View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by K-State Research Exchange OIL EXPORTS, NON-OIL EXPORTS AND ECONOMIC GROWTH: TIME SERIES ANALYSIS FOR KUWAIT (1970-2004) by EBRAHIM MERZA B.S., Kuwait University, Kuwait, 1996 M.A., University of Illinois at Urbana-Champaign, Illinois, 2000 M.A., University of Houston, Texas, 2003 AN ABSTRACT OF A DISSERTATION Submitted in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY Department of Economics College of Arts and Sciences KANSAS STATE UNIVERSITY Manhattan, Kansas 2007 ABSTRACT Kuwait is an oil-based economy that adopts an export promotion policy as the fundamental strategy for economic growth. The country has experienced remarkable economic growth and high per capita GDP for the last four decades. The export-led growth (ELG) hypothesis has been commonly used to examine the impact of exports on economic growth. Numerous studies support this hypothesis and found evidence that exports have a significant positive relationship with economic growth. However, it is not yet known how effective the ELG hypothesis is in small oil producing country like Kuwait. The central question addressed is whether the ELG hypothesis is valid in the case of Kuwait. This empirical research investigates the relationship of two components of exports (oil exports and non-oil exports) with economic growth by examining the ELG hypothesis using annual time series data for the Kuwaiti economy over the period 1970-2004. The study applies a number of econometric techniques: unit root test, cointegration test, error correction model (ECM), impulse responds function (IRF), and Granger causality test. The results of this dissertation show that all the variables are stationary in the first difference. Moreover, the cointegration test confirms the existence of the long run relationship among the three variables. The Granger test shows bidirectional causality between oil exports and economic growth, and a unidirectional causality from non-oil exports to economic growth. However, the causality results are consistent with the results reported by the ECM. OIL EXPORTS, NON-OIL EXPORTS AND ECONOMIC GROWTH: TIME SERIES ANALYSIS FOR KUWAIT (1970-2004) by EBRAHIM MERZA B.S., Kuwait University, Kuwait, 1996 M.A., University of Illinois at Urbana-Champaign, Illinois, 2000 M.A., University of Houston, Texas, 2003 A DISSERTATION Submitted in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY Department of Economics College of Arts and Sciences KANSAS STATE UNIVERSITY Manhattan, Kansas 2007 Approved by Major Professor E. Wayne Nafziger ABSTRACT Kuwait is an oil-based economy that adopts an export promotion policy as the fundamental strategy for economic growth. The country has experienced remarkable economic growth and high per capita GDP for the last four decades. The export-led growth (ELG) hypothesis has been commonly used to examine the impact of exports on economic growth. Numerous studies support this hypothesis and found evidence that exports have a significant positive relationship with economic growth. However, it is not yet known how effective the ELG hypothesis is in small oil producing country like Kuwait. The central question addressed is whether the ELG hypothesis is valid in the case of Kuwait. This empirical research investigates the relationship of two components of exports (oil exports and non-oil exports) with economic growth by examining the ELG hypothesis using annual time series data for the Kuwaiti economy over the period 1970-2004. The study applies a number of econometric techniques: unit root test, cointegration test, error correction model (ECM), impulse responds function (IRF), and Granger causality test. The results of this dissertation show that all the variables are stationary in the first difference. Moreover, the cointegration test confirms the existence of the long run relationship among the three variables. The Granger test shows bidirectional causality between oil exports and economic growth, and a unidirectional causality from non-oil exports to economic growth. However, the causality results are consistent with the results reported by the ECM. TABLE OF CONTENTS LIST OF FIGURES ...................................................................................................................... vii LIST OF TABLES....................................................................................................................... viii ACKNOWLEDGMENTS ............................................................................................................. ix DEDICATION.................................................................................................................................x Chapter 1. INTRODUCTION..........................................................................................................1 Chapter 2. ECONOMIC BACKGROUND FOR KUWAIT ...........................................................5 2.1 Introduction..........................................................................................................................5 2.2 Oil ........................................................................................................................................6 2.3 Social Welfare......................................................................................................................7 2.4 GDP and Per Capita GDP....................................................................................................7 2.5 Exports .................................................................................................................................9 2.5.1 Oil Exports................................................................................................................10 2.5.2 Non-Oil Exports........................................................................................................11 2.6 The Labor Market in Kuwait .............................................................................................12 2.6.1 The Wage Policy.......................................................................................................14 2.6.2 Employment:.............................................................................................................16 2.6.3 Unemployment:.........................................................................................................18 2.7 Currency.............................................................................................................................19 2.8 Kuwait and the GCC..........................................................................................................19 Chapter 3. LITERATURE REVIEW.............................................................................................21 Chapter 4. DATA AND METHODOLOGY.................................................................................39 4.1 Data....................................................................................................................................39 4.2 Methodology......................................................................................................................40 4.2.1 Unit Root Test...........................................................................................................41 4.2.1.1 Approach..........................................................................................................41 4.2.1.2 How to Make it Stationary...............................................................................42 4.2.1.3 ADF Test..........................................................................................................42 4.2.2 Cointegration Test.....................................................................................................43 4.2.2.1 Approach..........................................................................................................43 4.2.2.2 How to Perform the Cointegration Test...........................................................45 v 4.2.3 Error Correction Model (ECM) ................................................................................46 4.2.3.1 Approach..........................................................................................................46 4.2.3.2 How to Perform the ECM................................................................................47 4.2.4 Vector Autoregression (VAR) ..................................................................................47 4.2.4.1 Approach..........................................................................................................47 4.2.4.2 How to Estimate the VAR Model....................................................................48 4.2.4.3 Impulse Response Function (IRF) ...................................................................49 4.2.5 Causality Test............................................................................................................50 4.2.5.1 Approach..........................................................................................................50 4.2.5.2 How to Perform the Granger Causality Test....................................................50 Chapter 5. EMPIRICAL RESULTS..............................................................................................53 5.1 Unit Root Test....................................................................................................................53 5.2