Exports and Imports-Led Growth: Evidence from a Small Developing Economy

Abstract

This paper examines equilibrium relationships and dynamic causality between economic growth, exports, and imports in Nepal using time-series data between 1965 and 2020. This research examines the impact of exports and imports on the economic growth of Nepal and documents empirical evidence in exports-led growth, imports-led growth, growth-led exports, and growth-led imports hypotheses in both the short and long run. The test results show no evidence favoring the exports-led growth and growth-led exports hypotheses in both the short and long run. However, the study finds evidence supporting the imports-led growth hypothesis in the short term and the growth-led imports hypothesis in the long term. Overall, this paper finds no evidence in favor of the notion that foreign trade supports the economic growth of Nepal in the long run. The research findings may have important implications for policymakers in Nepal. The paper contributes to trade and economic growth literature by investigating the relationship between exports, imports, capital, and gross domestic products in a small economy such as Nepal, where exports make a minimal and imports make an extensive contribution to gross domestic products by using cointegration and the vector error correction model.