Export-led growth hypothesis: causality analysis for oil-based Gulf Cooperation Council countries

Abstract

The main objective of this study is to examine the export-led growth (ELG) hypothesis for the Gulf Cooperation Council (GCC) countries. More specifically, the study empirically investigates the long run relationship and the causality direction between aggregate export and economic growth and between disaggregate export (oil and non oil export) and economic growth for Bahrain, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates. Qatar, though one of the GCC countries is excluded from this study, since there is no data set suitable to examine the long run relationship between the variables under consideration. In the current study, the Johansen multivariate cointegration technique, the Granger causality test in the error correction model (ECM) framework, and the standard Granger causality test were applied to the investigation of the ELG hypothesis for the first model which is based on Ram's 1985 model. Moreover, the Ordinary Least Square (OLS) test was applied to the second model which is based on Feder's 1982 model to investigate how the export sector affects the non export sector (export-created externality) in these five countries. The estimation result of the Johansen cointegration test in chapter five showed that, with the exception of Saudi Arabia, there is a long run relationship between economic growth and both aggregate and disaggregate exports in the GCC countries. However, the results suggest that oil exports are not cointegrated with economic growth in the case of Oman, indicating that there is no long run relationship between these two variables. The results of causality test provide support for the ELG hypothesis in the long run only in the case of Oman, where aggregate exports Granger cause real GDP. However, our findings showed that this hypothesis has not been supported in the case of Kuwait, Saudi Arabia, or the United Arab Emirates. In the case of Bahrain, the results indicated that the causal relationship among these variables has not existed in the long run. The results obtained from investigating disaggregate exports showed that in regard to oil exports, a unidirectional causality from real GDP growth to oil exports was indicated in Kuwait, Saudi Arabia, and the United Arab Emirates while the reverse result was found in Oman. With regard to non oil exports, the causality tests clearly indicate that causality runs from GDP growth to non-oil exports in the UAE, and reverse causality is found for Oman. Bidirectional causality was found in the long run in Saudi Arabia and Kuwait. Oil and non-oil exports were found to have no causal relationship with economic growth in Bahrain. Finally, this study concludes with some implications for the GCC countries based on our empirical findings.