Testing for the Imports-Led Growth and the Growth-Led Imports Hypotheses in Panels for the Small Island World

This article aims at analysing the empirical relationship between real merchandise imports per capita and real GDP per capita for a set of 17 affiliated and 35 sovereign small islands over the period 1970-2019. Noting the lack of long time series for GDP per capita contrary to imports per capita, the goal is to check whether real imports per capita could be considered as a good predictor for standards of living for the small islands world in accordance with the theoretical claims. To this regard, we test for the imports-led growth and the growth-led imports hypotheses by running in a panel data framework both the Toda-Yamamoto Granger causality test based on VAR modelling, and the Pooled Mean Group estimator based on ARDL modelling. Finally, bidirectional causality holds in the short and the long-run for the group of sovereign small islands, giving strong support to the two hypotheses. However, even if in the short-run bidirectional causality seems to exist, only the growth-led imports hypothesis is validated in the long-run for the affiliated small islands. Anyway, our results state that a high level of imports per capita could be considered as a good predictor for a high level of standards of living for small islands.