Trade and Growth in the Pacific Islands - Empirical Evidence from the Bounds Test to Level Relationships and Granger Causality Tests

Although the relationship between international trade and economic growth has found a wide application area in the literature over the years, further attention is needed for small island economies. This study employs the bounds test for Level Relationships and Granger causality tests to investigate a long-run equilibrium relationship between international trade and real income growth, and the direction of causality among themselves in three selected Pacific Islands: Fiji, Papua New Guinea and Solomon Islands. Results reveal that a long run equilibrium relationship can be inferred between international trade and economic growth in the case of Fiji and Solomon Islands whereas economic growth is cointegrated only with exports of goods and services in Papua New Guinea. Granger causality test results show that there are bidirectional causality between exports and economic growth, and between exports and imports in Fiji Islands. Economic growth in Solomon Islands stimulates a growth in exports of goods and services, and exports stimulates a growth in imports of goods and services. No causal relationship has been obtained between international trade (both exports and imports) and economic growth in the case of Solomon Islands. The major finding of this study is that trade-led growth hypothesis cannot be inferred for the Pacific Islands.

Keywords: economic growth, long-run equilibrium relationship, Granger causality test
JEL Classification: F43, C5