European Journal of Scientific Research - EuroJournals

Role of Trade, External Debt, Labor Force and Education in
Economic Growth Empirical Evidence from Pakistan by using ARDL Approach 859
Table 4: Error Correction Representation for the ARDL Model ARDL (1,1,0,0,0)
Independent variables Coefficient S .E t Statistics P value
Δ lnTT 0.2829 0.1500 1.8862 0.07
Δ lnLF 1.2120 0.4636 2.6141 0.02
Δ lnTD -0.8966 0.1931 0.4643 0.64
Δ Edu 0.0031 0.0405 0.0784 0.93
ECM(-1) -0.4512 0.2005 2.2502 0.03
R-Squared .39
S.E. of Regression .06
S.D. of Dependent Variable .07
DW-statistic 2.37
F-stat. F(5, 23) 2.87
significance [.037]
The ECM equation is given as
ECM = Ln GDPt -.031266* lnTT t +0.19869* lnTD t + 0.0070366* Edu t -2.6859* lnLF t -
2.8694*C
Examination of error correction model in Table 4 shows that labor force has the strongest effect
on economic growth in the short run which is followed by total trade. The short-run effect of total
external debt on economic growth in Pakistan is weak and statistically insignificant at even 10% level
of significance. The coefficient of ECM term has correct sign and significant at 10 %. It confirms the
presence of relationship between the variables. The Coefficient of the ECM term suggests that
adjustment process is quite fast and 45% of the previous year’s disequilibrium in economic growth
from its equilibrium path will be corrected in the current year. Thus, the evidence presented in this
section suggests that economic growth in Pakistan is mainly determined by fluctuations in labor force ,
and trade both in the short run and the long run. Total debt is not an important determinant of economic
growth either in the short-run or the long-run.
The CUSUM and CUSUMSQ plots to check the stability of short run and long run coefficients
in the ARDL error correction model are given below in figure 1:
1.5
1.0
0.5
0.0
Figure 1:
Plot of Cumulative Sum of Squares of
Recursive Residuals
-0.5
1977 1982 1987 1992 1997 2002 2005
The straight lines represent critical bounds at 5% significance level