Validity of the export-led growth hypothesis: Some evidence from GCC countries

Numerous studies have confirmed the positive effect of export expansion on economic growth, through enhanced economies of scale, adoption of advanced technology and greater capacity utilization. In particular, export growth increases investment in those sectors in which a country has a comparative advantage, fostering the adoption of new technologies, increasing national output and raising the rate of economic growth. Moreover, an increase in exports increases the inflow of foreign exchange, allowing the expansion of imports of services and capital goods, which are essential to improving productivity and economic growth. However, a smaller number of studies have found that exports have a negative effect on economic growth, noting that this effect arises from the fact that in some countries primary exports constitute a large share of total exports. Inasmuch as the Gulf Cooperation Council (GCC) countries are natural resource abundant countries, which have achieved significant economic growth, this research investigates whether exports are the source of their success.

This study examines the validity of the Export-Led Growth hypothesis (ELG) and Growth-Led Exports hypothesis (GLE) in five GCC countries, namely, Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates. The study uses an augmented production function and annual time series data over the period 1975-2016. For the estimation of the empirical models employed in the study, the Johansen co-integration test is used to test the existence of a long-run relationship between the variables examined. In addition, the multivariate Granger causality test in a Vector Error Correction Model framework and a modified version of the Wald test are applied to examine the direction of the short-run and long-run causality respectively.

The co-integration results confirm the existence of long-run relationships among the variables under consideration for all countries except Oman. The short-run Granger causality results support the existence of causality from merchandise exports to economic growth for the United Arab Emirates (UAE), a bi-directional causality between exports and economic growth for Kuwait, but no causality between exports and economic growth for Oman and Saudi Arabia. As for long-run causality, the empirical results provide evidence to support the ELG for Bahrain, the GLE for Kuwait and Saudi Arabia, and no causality between exports and economic growth for Oman and the UAE.

Keywords: Exports, Economic Growth, GCC, Causality