Both the import demand of developing countries and the world demand for their exports have generally been assumed in the literature to be determined by nonmarket forces. Therefore, products imported and exported by these countries have been considered to be relatively insensitive to changes in prices. The evidence for this view can be seen in the models of trading behavior of developing countries that have been constructed by Chenery and Strout (1966) and by Maizels (1968).
Individual country studies have in certain cases included price variables as determinants of imports and exports but these studies, while certainly useful, do not allow one to generalize easily across developing countries. One recent study by Houthakker and Magee (1969) did consider the trading patterns of a few developing countries, and in a certain sense the present paper can be considered as an extension of that study to cover developing countries more comprehensively.
The essential aim of this paper is to provide estimates of import and export demand functions for 15 countries that can be characterized as “developing” and to test the hypothesis of whether changes in prices of traded and nontraded goods exert any significant influence on the trade flows of these countries. In addition, an attempt is made to demonstrate how the role of quantitative restrictions on trade can be approximated and incorporated into the estimates. This is necessary because (1) on the import side of the trade accounts, controls have been regarded as commonplace in developing countries; and (2) on the export side, considerable attention has focused on imposition of quotas and other restrictions on the flow of exports by the buyer countries. Although the precise role of quantitative restrictions may actually be nonquantifiable, it will be shown that, under certain assumptions, approximations are possible and tests can be made to evaluate their importance.
The 15 countries covered in this paper are Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Ghana, India, Morocco, Pakistan, Peru, the Philippines, Sri Lanka, Turkey, and Uruguay. The period of study was 1951–69 on an annual basis. The countries were selected for two reasons: (1) taken together they represented a fairly wide geographical coverage and thus would provide some generalization, and (2) each had consistent data for the relevant variables over the entire period.
Section I of this paper describes the demand functions for imports and exports that will be estimated. Section II discusses the results obtained from estimating these equations. The implications of the results and the conclusions reached are set forth briefly in Section III. Data sources are listed in the Appendix.
APPENDIX Data Sources
All import and export quantity and unit value data were obtained from the International Monetary Fund, International Financial Statistics, various issues, except for two countries. For Argentina, the source of data was the Central Bank of the Republic of Argentina, Comercio Exterior; for Pakistan, unpublished data were obtained from the Pakistan Institute of Development Economics.
Nominal gross national product (GNP) data were taken from International Financial Statistics; real GNP data, from the United Nations, Statistical Yearbook, various issues. The implicit deflator was generated.
World income and prices are defined as real GNP reported by the Organization for Economic Cooperation and Development (OECD) and the OECD GNP deflator, respectively. Data were taken from OECD, Main Economic Indicators.
All data are in terms of U. S. dollars. Where a series was only available in domestic currency, it was converted by use of the current official exchange rate. In cases of multiple rates, an implicit rate for conversion was constructed by use of the trade balance in domestic and in foreign currency.
Chenery, Hollis B., and Alan M. Strout, “Foreign Assistance and Economic Development,” American Economic Review, Vol. 56 (September 1966), pp. 679–733.
Dutta, M., “A Prototype Model of India’s Foreign Sector,” International Economic Review, Vol. 5 (January 1964), pp. 82-103.
Hendry, David F., “The Consequences of Mis-specification of Dynamic Structure, Autocorrelation and Simultaneity in a Simple Model with an Application to the Demand for Imports” (mimeographed, July 1972).
Houthakker, H. S., and Stephen P. Magee, “Income and Price Elasticities in World Trade,” Review of Economics and Statistics, Vol. 51 (May 1969), pp. 111–25.
Islam, Nurul, “Experiments in Econometric Analysis of an Import Demand Function,” Pakistan Economic Journal, Vol. 11 (September 1961), pp. 21–38.
Khan, Mohsin S., and Knud Z. Ross (1974a), “Cyclical and Secular Income Elasticities of the Demand for Imports,” Review of Economics and Statistics (forthcoming, 1974).
Khan, Mohsin S., and Knud Z. Ross (1974b), “The Functional Form of the Import Demand Equation” (unpublished, International Monetary Fund, September 19, 1974).
Malinvaud, E., Statistical Methods of Econometrics, Studies in Mathematical and Managerial Economics, Vol. 6, ed. by Henri Thiel (Amsterdam, London, New York, 1970).
McCallum, B. T., “Relative Asymptotic Bias from Errors of Omission and Measurement,” Econometrica, Vol. 40 (July 1972), pp. 757–58.
Ramsey, J. B., “Tests for Specification Errors in Classical Least-Squares Regression Analysis,” Journal of the Royal Statistical Society, Series B, Vol. 31, No. 2 (1969), pp. 350–71.
Sargan, J. D., “Wages and Prices in the United Kingdom: A Study in Econometric Methodology,” in Econometric Analysis for National Economic Planning, ed. by P. E. Hart and others (London, 1964).
Turnovsky, Stephen J., “International Trading Relationships for a Small Country: The Case of New Zealand,” Canadian Journal of Economics, Vol. 1 (November 1968), pp. 772–90.
Mr. Khan, an economist in the Financial Studies Division of the Research Department, holds degrees from the London School of Economics and Columbia University. In addition to colleagues in the Fund, the author is greatly indebted to D. F. Hendry, H. G. Johnson, and C. R. Wymer for their comments and suggestions.
Evidence on the appropriate functional form of the import demand equation is contained in Khan and Ross (1974b).
In the case of the assumption of equilibrium, a misspecification bias in the estimates would occur if in fact the data were generated by a disequilibrium system. If the assumption of infinite price elasticities of supply was not met, the result would be simultaneous equation bias.
If quantitative restrictions are correlated with either of the explanatory variables, the estimated elasticities would be biased and inconsistent. This would be the case of specification error due to an omitted variable. See Ramsey (1969).
The program used yields asymptotic maximum-likelihood estimates. The technique used is from Sargan (1964).
The long-run price elasticity would be calculated as
In the case of Ecuador, the sign of 1 – λ is negative, implying λ > 1.
There were eight such cases in the equation results for imports, versus two for exports.
Alternative explanations in terms of exchange rate changes or of incorrect specification of the lag structure would have to show why differential impacts occur in imports and exports.