Trade Theories for Islamic Developing Countries - Bangladesh Experience

Abstract

The fundamental strength of an economy lies on the availability of the low cost factors of production in comparison to other countries in the region. The growth rate in Bangladesh Ready-Made Garment industry (one of the fast growing Islamic economies) has been significantly high in the last three decades. This study is pursued with the objective of examining the effect of trade and monetary policies on the success of Ready-Made Garments industry in Bangladesh, with special attention given on the roles of India and China in the Indian subcontinent. The study employs Johansen-Juselius Co integration test and Vector Error Correction Modeling (VECM). Using yearly data from January 1990 through September 2011, this study reveals a significant long-term relationship between RMG export of Bangladesh and the four tested explanatory variables (Merchandise Export of China and India, domestic inflation in Bangladesh and Bangladesh exchange rate). The statistical results from the Granger Causality test show a presence of dynamic relationship between the performance of RMG export of Bangladesh and the fluctuation in Bangladesh exchange rates. However, this dynamic relation is non-existent in relation to factors involving merchandise export from China and India as well as domestic inflation.