Export Demand and Supply for Groups of Non-Oil Developing Countries

Marian Bond

doi:10.5089/9781451956696.024.A003

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Export Demand and Supply for Groups of Non-Oil Developing Countries

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Marian Bond

Marian Bond
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Publication Date:: 01 Jan 1985

eISBN:: 9781451956696

Language:: English

Keywords:: SP; demand equation; importing group; making export production; developing country export; export growth; Real effective exchange rates; Imports; Export prices; Export performance

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OVER THE PAST few decades, exports have played a critical role in the economic growth of non-oil developing countries, and policies to increase them have often been employed as an instrument to deal with balance of payments difficulties. In recent years, in particular, adjustment programs in these countries have strongly emphasized the need for export expansion to achieve a sustainable current account balance compatible with an adequate and steady rate of economic growth. After 1981, the exports of many non-oil developing countries contracted, owing to a world recession that dampened demand for their exports.

Abstract

This paper presents a model of export quantity flows from groups of exporting non-oil developing countries to groups of importing countries, to calculate the effects both of the world recession and domestic pricing policies on export growth. The model contains separate equations for export volume flows from each exporting group to each importing group and, in particular, measures the responsiveness of export volumes to real income growth in importing countries and to changes both in effective exchange rates and in deviations from output in the exporting countries.

The purpose of grouping non-oil developing countries is to pose and answer broader-based questions than would be possible from a model based on individual developing countries. For example, when a group of exporting countries devalues, export volumes are affected in a way that is quantifiably different from the impact of a devaluation of an individual exporting country. When one country devalues, any increase in its exports is likely to be offset by a reduction in the exports of competitor countries. These offsetting effects will be much lower among groups of exporting countries, particularly if the groups are defined by type of export and therefore do not compete directly with other groups. Similarly, while an individual country can significantly increase its exports by increasing its price competitiveness, for a group of countries the elasticity of demand for its exports with respect to income in importing countries tends to be a constraint.

In obtaining the empirical estimates, exporting countries were divided into four groups: low-income countries, major exporters of manufactures, net oil exporters, and other net oil importers (middle-income countries that, in general, export mainly primary products).¹ Importing countries were divided into three groups: industrial countries, oil-producing countries (of the Organization of Petroleum Exporting Countries (OPEC)), and non-oil developing countries.

While the presentation in this paper concentrates on the basic development of the model and its estimated parameters, the model is used to produce short-run projections of the growth of export volumes for groups of non-oil developing countries under alternative assumptions about economic growth in industrial, OPEC, and non-oil developing countries.

Section I of the paper reviews previous studies of the demand and supply determinants of export growth. Section II develops the model, while Section III presents the empirical results, and Section IV summarizes the conclusions.

I. Review of the Literature

Many studies on export flows assume that exports are determined by supply-side variables, such as domestic prices (official or market-determined), the growth of gross domestic product (GDP), taxes, tariffs, and subsidies. Fewer studies focus on the demand-side determinants of exports, such as demand for imports in market countries or prices in competitor countries. This gap in the literature seems to have arisen because the typical non-oil developing country is assumed to be small, and to face an infinitely elastic demand for its exports, so that changes in foreign demand can influence exports only through changes in world prices.²

This lack of attention to the influences of foreign demand may also be traced to the almost total concentration on exports from individual countries rather than from groups of countries. If the focus is on groups, two important differences arise. First, the small country hypothesis is no longer relevant; the assumption that demand is infinitely elastic is inappropriate for a group. Second, pricing policies may not have the desired effect. Countries in a group that produce a product for which the market price elasticity is low may have to allow a considerable price fall for any increased supply to be absorbed. By contrast, when a single country that is not a dominant supplier increases exports, these may be absorbed with no measurable fall in the market price. Very few attempts have been made to model simultaneously the demand and supply of exports from non-oil developing countries.

Of the numerous studies that examine the relationship between developing country exports and supply-side variables, Balassa (1978a, 1978b) and Tyler (1981) find a significant positive relationship between economic growth in developing countries and their supply of exports of manufactures. Elson (1973) and Teigeiro and Elson (1973) conclude that, during the postwar period, exchange rate movements have been an important determinant of the supply of exports from Argentina and Colombia. Bhagwati (1978), Bergsten and Cline (1982), Cline (1978), and Krueger (1978a, 1978b) analyze the effect of different trade policies on the growth and export behavior of developing countries. Their findings from country studies support the view that altering trade strategies toward greater export orientation is consistent with more export growth and greater employment opportunities. A great deal of accumulated evidence demonstrates the positive response of domestic supply in developing countries to changes in producer prices (Askari and Cummings (1976) and Bond (1983)). While developing country exports are affected by the forces of demand as well as supply, many studies naturally focus on domestic supply responses, since there is little or no domestic demand for many export commodities. These studies can be taken to provide strong empirical evidence on the importance of prices in determining the supply of exports in the countries studied.

The principal analyses of the demand determinants of export growth of developing countries are by Rhomberg (1968), Deppler and Ripley (1978), Goldstein and Khan (1982), Houthakker and Magee (1969), and Khan (1974). These studies focus on how changes in aggregate demand are transmitted from industrial to developing countries through the link between real income growth in the industrial countries and export growth in groups of developing countries. The results of these studies demonstrate a significantly positive elasticity for the volume of exports of non-oil developing countries with respect to real gross national product (GNP) in industrial countries. Houthakker and Magee, using simple export demand equations, and Khan, using two-stage estimation procedures, find that real income in importing countries and price competitiveness in exporting countries are the principal determinants of exports of a number of developing countries. Estimates by Houthakker and Magee of income elasticities of importing countries with respect to exports of individual developing countries (excluding Europe and Israel) range from 0.34 (for Brazil) to 2.01 (for Peru), while estimates by Khan range from 0.2 (for Colombia) to 1.12 (for Peru).³ The mean income elasticity, calculated over individual developing countries (excluding Europe and Israel), is less than 1.0 in both papers—0.9 (Houthakker and Magee) and 0.5 (Khan), although the former estimate is probably biased upward because supply variations are excluded from the equation. Goldstein and Khan record that the size of the estimated elasticity itself has been increasing over the past 20 to 30 years. Using a reduced-form equation, they estimate an income elasticity of 2.3 for the period 1973-80; this estimate is considerably higher both than their own estimate of 1.33 for 1963-80, and Rhomberg’s estimate of 0.37 for 1953-65, based on a virtually identical equation. Goldstein and Khan explain their finding by noting that the income elasticity for manufactures is higher than for other commodities, and that the share of manufactures in the total exports of non-oil developing countries has been increasing steadily over the past two decades.

Trade links between developed and developing countries have also been studied by Hicks and others (1976), who specify both demand and supply equations for groups of developing countries. They analyze the impact of alternative policies of importing industrial and oil-producing countries; slackening growth in the industrial countries is shown to be more detrimental to developing countries than the direct effects of the higher price of petroleum.

Estimates for competitor price elasticities for non-oil developing countries are not nearly as robust as estimates for income elasticities. However, both Khan and Houthakker and Magee demonstrate that individual developing countries do not face an inelastic demand schedule and that price variations do affect the quantity of exports demanded.

II. Structure of the Model

The model distinguishes between long-term developments and short-term fluctuations. Long-term changes are captured by a trend term. Short-term fluctuations in demand are transmitted from economic activity in the importing groups to exports of the exporting group. Short-term fluctuations in supply are transmitted from the domestic output of the exporting group (measured by deviations from trend) to their own exports. Price changes are measured by a weighted average of the real effective exchange rates of the countries in the appropriate group.⁴ The effects of price changes on exports are assessed using both demand factors in the importing groups and supply factors in the exporting groups.

Two equations are initially specified for each individual country: an export demand and an export supply equation. A single reduced-form equation is obtained for each country by assuming equilibrium conditions. These reduced-form equations are then aggregated for each exporting and importing group, and one equation derived for exports from each exporting group i to each importing (or “market”) group j.

In the equations, the exporting countries are labeled p = l … m, and the importing countries are labeled q = l … m … n. The volume of exports from country p to country q are labeled XV_pq. The m exporting countries are summed into four groups, i = 1,2,3,4, and the n importing countries are summed into three groups, j = 1,2,3.⁵ The volume of exports from exporting group i to market group j are labeled XV^ij. Each of the i groups is of size m_i, and each of the j groups is of size n_j.

Export Demand Equation

The demand for the exports of an individual developing country is sometimes assumed to be perfectly elastic, particularly when the country has a large proportion of primary products in its exports. This assumption implies that export volume varies only through supply. However, developing countries sometimes export products that are differentiated by place of origin, and demand for these will be less elastic. The demand for exports from a group of countries will be even less elastic. To explain the market demand for the exports of groups of non-oil developing countries, an individual country’s exports are first considered.

The export demand equation describes country q’s demand for country p’s exports (XVD_pq), which is hypothesized to depend on four variables: real GNP in country q (GNP_q); country p’s price in the qth market (PX_pq) relative to country p’s competitors’ prices (PC_q); country p’s price in the qth market (PX_pq) relative to the domestic price in the qth market (PD_q); and a trend term (t) that takes account of factors that affect the allocation of country q’s imports from country p over time:⁶

\begin{matrix} {X V D}_{p q} = a_{o} {G N P}_{q}^{a 1} ({P X}_{p q} / {{P C}_{q})}^{a 2} ({P X}_{p q} / {{P D}_{q})}^{a 3} e^{a_{4} t} . & (1) \end{matrix}

PC_q is a weighted index of the export prices of all countries, s, that compete with country p in the qth market;

\begin{matrix} 1 n P C_{q} = \underset{s \neq q}{Σ} α_{s q} 1 n (P X_{s} / E_{s}) \\ \begin{matrix} \begin{matrix} α_{s q} \equiv \frac{X V_{s q}}{\underset{s \neq q}{Σ} X V_{s q}}; \underset{s}{Σ} α_{s q} = 1 \end{matrix} \\ \begin{matrix} {\begin{matrix} P X \end{matrix}}_{p q} = P X_{p} / E_{p} \\ P D_{q} = P_{q} / E_{q}, \end{matrix} \end{matrix} \end{matrix}

where E is a unit of the relevant country’s local currency per U.S. dollar. All variables except prices are defined in U.S. dollars. The actual flow of exports is assumed to adjust to demand over one year.

In equation (1), a₁ is country q’s income elasticity of demand for country p’s exports; a₂ is the elasticity of q’s demand for p’s exports with respect to the export prices of foreign competitors, relative to p’s export prices, and thus measures the substitutability between country p’s exports and those of its competitor countries, s, in the qth market; and a₃ is the elasticity of q’s demand forp’s exports with respect to q’s domestic prices relative to p’s export prices, thereby indicating the substitutability between country p’s exports and country q’s domestic output. It is expected that a₁ will be positive, and a₂ and a₃ will be negative.

Export Supply Equation

Country p’s export supply to country q (XVS_pq) also depends on four variables: the domestic price level in country p (PD_P), relative to the price of exports in market q (PX_pq); output in country p measured by its deviation from trend (QT_P); other factors (Z_p), such as weather conditions, that affect the country’s exports; and a trend term (t) that takes into account factors that affect the export production of country p over time:⁷

\begin{matrix} \begin{matrix} \begin{matrix} {X V S}_{p q} = b_{0} {({P D}_{p} / {P X}_{p q})}^{b_{1}} {Q T}_{p}^{b_{2}} Z_{p}^{b_{3}} e^{b_{4} t} \end{matrix} \\ Q T_{p} = {G D P}_{p} / {G D P T}_{p .} \end{matrix} & (2) \end{matrix}

GDP_P is an index of country p’s domestic output. GDPT_P is an index of country p’s potential domestic output derived by the trend-through-peaks method. All variables except prices are measured in U.S. dollars.

In equation (2), exporters are expected to increase their supply if the price of exports in local currency rises relative to domestic prices (a proxy for domestic costs). As export prices rise relative to domestic costs, export supply increases. Therefore it is expected that the sign of coefficient b₁ will be negative. Adjustment of actual exports to the supply of exports is assumed to take place in the period of one year. However, certain products, such as coffee, require very long gestation periods before increased output can occur, and for exporting groups that have a large proportion of these products in their exports, the coefficients will be biased downward.

Reduced Form

Equations (1) and (2) constitute the model for an individual country and can be used together with the equilibrium conditions given in equation (3):

\begin{matrix} {\begin{matrix} X V \end{matrix}}_{p q} = {X V D}_{p q} = {X V S}_{p q} . & (3) \end{matrix}

The reduced-form equation is obtained by solving equations (1), (2), and (3) for PX_pq. Written in logarithmic form, this equation shows the effects of all the exogenous variables on the quantity of exports from country p to country q:

\begin{matrix} 1 n {X V}_{p q} = c_{0} + c_{1} 1 n {R E E R}_{p q} + c_{2} 1 n {G N P}_{q} + c_{3} 1 n {Q T}_{p} + c_{4} 1 n Z_{p} + c_{5} t, & (4) \end{matrix}

where REER_pq is the real effective exchange rate for country p vis-à-vis country q and is calculated as follows:

\begin{matrix} \begin{matrix} \begin{matrix} 1 n {R E E R}_{p q} = δ \cdot 1 n (P D_{p} / P C_{q}) + (1 - δ) \cdot 1 n (P D_{p} / P D_{q}) \end{matrix} \\ δ = a_{2} / (a_{2} + a_{3}); (1 - δ) = a_{3} / (a_{2} + a_{3}) . \end{matrix} & (5) \end{matrix}

The first part of equation (5) shows the competition between country p and its competitors in the qth market, and the second part the competition between country p and country q in the qth market. The weight of the first part in the total index is reflected by δ.

The reduced-form coefficients are related to the structural parameters in the following way:

\begin{matrix} c_{0} = [\frac{b_{0}}{b_{1}} + \frac{a_{0}}{a_{2} + a_{3}}] \cdot B; c_{1} = B; c_{2} = \frac{a_{1}}{a_{2} + a_{3}} \cdot B \\ c_{3} = \frac{b_{2}}{b_{1}} \cdot B; c_{4} = \frac{b_{3}}{b_{1}} \cdot B; c_{5} = [\frac{a_{4}}{a_{2} + a_{3}} + \frac{b_{4}}{b_{1}}] \cdot B, \end{matrix}

where B =a₂+ a₃+ b₁ and is negative. The expected signs of the behavioral parameters lead us to expect the following pattern of signs for the reduced-form coefficients:

c_{0} ≷ 0; c_{1} < 0; c_{2} > 0; c_{3} ≷ 0; c_{4} ≷ 0; c_{5} ≷ 0.

The expected signs show that a nominal devaluation of the exchange rate by country p will increase its export volume, as a result both of demand and supply effects. On the demand side, country p’s export prices will have fallen compared with competitor prices, and compared with the price in country q, so that the demand for export volume from country p increases. On the supply side, export prices in domestic currency terms will have risen compared with domestic prices, making export production more profitable.⁸ Although the supply effects are likely to be more important for an individual country, both demand and supply for export volumes are affected by devaluation when countries are grouped together.

Aggregation

Equation (4) is assumed to be an adequate description of the determination of export flows between one exporting country and one importing country. Owing to nonlinearities, however, the exact aggregation of equation (4) is possible only under highly restrictive assumptions that are unlikely to be satisfied in practice. Nevertheless, it seems reasonable to assume here that equation (4) can be used as an adequate approximation of the relationships in which XV^ij represents exports from one group of countries to another; the real effective exchange rate, GNP in market groups, deviations of output from trend in exporting groups, other factors, and the trend term are appropriately weighted averages. The estimating equation describing group i’s export flows to importing group j is specified in log-linear form as follows:⁹

\begin{matrix} \begin{matrix} 1 n {X V}^{i j} = d_{0} + d_{1} 1 n {R E E R}^{i j} + d_{2} 1 n {G N P}^{j} & (6) \end{matrix} \\ + d_{3} 1 n {Q T}^{i} + d_{4} 1 n Z^{i} + d_{5} t . \end{matrix}

XV^ij is the flow of exports from exporting group i to importing group j; REER^ij is the real effective exchange rate of group i vis-à-vis its competitors in market j and vis-à-vis domestic prices in market j; GNP^j is the importing group’s GNP (or GDP); QTⁱ is the deviation of output from trend in exporting group i; and Zⁱ reflects other factors that influence exports from group i. Intragroup trade is excluded from the endogenous and exogenous variables when the developing countries are the importing group.

III. Empirical Results

Equation (6) was estimated using annual data from 1967 to 1981 and ordinary least-squares estimation procedures. The four exporting groups were defined to match the former analytical subgroups used in the World Economic Outlook (International Monetary Fund (1983)). These are: low-income countries, major exporters of manufactures, net oil exporters, and other net oil importers. A sample of 36 countries was selected to represent the exporting groups. These countries were chosen in such a way that the four non-oil developing country groups were adequately represented. The three importing groups were also defined to match the classification of countries used in the WEO. These are: industrial countries, oil-producing (OPEC) countries, and non-oil developing countries. All the Fund member countries were taken to represent the importing groups. The analytical subgroups are defined in Appendix I. Definitions of the data used in the estimation and the sources of these data are given in Appendix II, which also describes the dummy variables used to represent the qualitative explanatory variables.

One of the drawbacks of using these analytical subgroups as a definition for the exporting groups is that they are not based solely on a classification of exports by commodity. Consequently, the estimated price and income coefficients reflect a blend of commodities rather than one commodity. For example, the estimated coefficient on GNP for industrial countries for the exporters of manufactures shows how manufactures, primary products, and oil exports from the group of exporters of manufactures respond to short-term fluctuations in activity in industrial countries rather than how manufactured goods alone respond to fluctuations in industrial country activity. This drawback should be kept in mind.

The Fund’s former analytical subgroups used in the analysis are determined largely on the basis of export composition and per capita income. Net oil exporters are grouped separately from the other non-oil developing countries because their terms of trade and their exports are subject to different influences. Developing countries that are net importers of oil are split into three groups: low-income countries, whose 1977 per capita GDP is estimated to have been equivalent to no more than US$300; other net oil importers, which are middle-income countries whose per capita GDP exceeded US$300 in 1977, and whose exports as a group consist chiefly of primary commodities; and the major exporters of manufactures, whose exports of manufactures have become relatively large. (These include most of the “newly industrializing countries,” a concept used in World Bank studies.) The major exporters of manufactures account for well over 60 percent of combined total exports of all the oil importing developing countries.

The estimates of the export flows from the four exporting groups to the three importing groups, using equation (6), are presented in Table 1. The estimated coefficients are consistent with the relationships hypothesized in equation (6). Exports from non-oil developing countries depend on growth in the importing countries, the real effective exchange rate, deviations of output from trend, and the trend term. For all groups, the lagged responses of export flows to the real effective exchange rate are captured by averaging the latter over two periods: first, the average of rates during the current period and the first preceding period; and second, the average over the second and third preceding periods. These two variables are designed to reflect the short-term and longer-term developments in the real effective exchange rate. Exports respond in large part to changes in the real effective exchange rate within two years; consequently, the variable representing lags in the second and third preceding periods was dropped from the equation, and REER^ij stands only for current and recent real effective exchange rates.

Table 1.

Estimates of Exports from Exporting to Importing Group, 1967-81

Note: See Appendix I for the classification of the groups. REER is the real effective exchange rate; GNP is gross national product; t₁, t₂ are time trends; and DOIL 1, 2 are dummy variables reflecting the two oil crises of 1973-74 and 1979-80; R² is the coefficient of determination; DW is the Durbin-Watson test statistic; SEE is the standard error of estimate. The t-statistics are in parentheses. Sources: The data used in the estimation were from International Monetary Fund, Direction of Trade Statistics, various issues; International Financial Statistics: Supplement on Trade Statistics, various issues; and Fund staff estimates.

^¹Corrected for second-order autocorrelation ρ₁ = –.961 (3.67); ρ₂ = –.513 (1.89).

^²Corrected for first-order autocorrelation ρ₁ = .444 (1.73).

^³Estimated over the period 1972–81.

^⁴Corrected for first-order autocorrelation ρ₁ = –.511 (2.26).

Table 1.

Estimates of Exports from Exporting to Importing Group, 1967-81

Exporting Group to Importing Group		Constant	REER^ij	GNP^j	t₁	t₂	Cu¹	DOIL ¹	DOIL ²	R ²	DW	SEE
Low-income		-3.67	-0.76	1.28	0.05	0.04				.966	2.02	0.05
	to industrial¹	(1.29)	(10.15)	(3.92)	(4.15)	(2.81)
Middle-income		-8.03	-0.10	1.42	-0.02	0.02		-0.11		.881	1.60	0.04
	to industrial²	(1.00)	(0.92)	(1.48)	(0.89)	(2.03)		(2.59)
Major exporters of		-21.12	-0.83	2.91	-0.02		-0.72	0.05		.998	1.94	0.02
	manufactures to industrial	(12.21)	(2.24)	(14.50)	(2.23)		(0.87)	(2.42)
Net oil exporters		-12.66	-1.35	1.97	-0.03				0.33	.898	1.85	0.10
	to industrial³	(0.54)	(1.83)	(0.72)	(0.41)				(2.33)
Low-income to		-16.58	-0.58	1.37	-0.10			-0.31	0.54	.981	2.39	0.09
	oil-producing	(7.65)	(3.02)	(6.87)	(3.34)			(3.77)	(4.67)
Middle-income to		-4.53	-0.20	0.51	0.01	0.16			-0.21	.995	2.32	0.07
	oil-producing	(3.33)	(2.25)	(1.86)	(0.04)	(11.00)			(4.13)
Major exporters of		-22.36	-0.59	1.88	0.12		-5.60	0.11		.994	1.52	0.09
	manufactures to oil-producing	(2.55)	(0.65)	(2.77)	(4.18)		(2.01)	(1.93)
Net oil exporters to		-1.70	-2.12	0.55	-0.04			0.33	-0.41	.851	1.62	0.10
	oil-producing	(0.26)	(1.81)	(1.07)	(0.94)			(2.34)	(3.08)
Low-income to		-15.79	-0.98	1.36	-0.01	0.05		-0.33		.861	2.05	0.11
	non-oil developing	(1.86)	(2.86)	(2.10)	(0.13)	(1.28)		(5.90)
Middle-income to		-39.50	-1.39	2.84	-0.12					.980	1.98	0.06
	non-oil developing	(3.45)	(2.86)	(3.38)	(2.26)
Major exporters of		-13.04	-0.37	0.85	0.10	0.10	-0.30			.996	2.19	0.04
	manufactures to non-oil developing⁴	(3.69)	(0.36)	(3.39)	(5.47)	(5.36)	(1.51)
Net oil exporters to		-27.11	-1.77	1.94	-0.01				0.26	.968	2.25	0.05
	non-oil developing	(2.30)	(3.31)	(2.25)	(1.60)				(3.67)

^¹Corrected for second-order autocorrelation ρ₁ = –.961 (3.67); ρ₂ = –.513 (1.89).

^²Corrected for first-order autocorrelation ρ₁ = .444 (1.73).

^³Estimated over the period 1972–81.

^⁴Corrected for first-order autocorrelation ρ₁ = –.511 (2.26).

Table 1.

Estimates of Exports from Exporting to Importing Group, 1967-81

Exporting Group to Importing Group		Constant	REER^ij	GNP^j	t₁	t₂	Cu¹	DOIL ¹	DOIL ²	R ²	DW	SEE
Low-income		-3.67	-0.76	1.28	0.05	0.04				.966	2.02	0.05
	to industrial¹	(1.29)	(10.15)	(3.92)	(4.15)	(2.81)
Middle-income		-8.03	-0.10	1.42	-0.02	0.02		-0.11		.881	1.60	0.04
	to industrial²	(1.00)	(0.92)	(1.48)	(0.89)	(2.03)		(2.59)
Major exporters of		-21.12	-0.83	2.91	-0.02		-0.72	0.05		.998	1.94	0.02
	manufactures to industrial	(12.21)	(2.24)	(14.50)	(2.23)		(0.87)	(2.42)
Net oil exporters		-12.66	-1.35	1.97	-0.03				0.33	.898	1.85	0.10
	to industrial³	(0.54)	(1.83)	(0.72)	(0.41)				(2.33)
Low-income to		-16.58	-0.58	1.37	-0.10			-0.31	0.54	.981	2.39	0.09
	oil-producing	(7.65)	(3.02)	(6.87)	(3.34)			(3.77)	(4.67)
Middle-income to		-4.53	-0.20	0.51	0.01	0.16			-0.21	.995	2.32	0.07
	oil-producing	(3.33)	(2.25)	(1.86)	(0.04)	(11.00)			(4.13)
Major exporters of		-22.36	-0.59	1.88	0.12		-5.60	0.11		.994	1.52	0.09
	manufactures to oil-producing	(2.55)	(0.65)	(2.77)	(4.18)		(2.01)	(1.93)
Net oil exporters to		-1.70	-2.12	0.55	-0.04			0.33	-0.41	.851	1.62	0.10
	oil-producing	(0.26)	(1.81)	(1.07)	(0.94)			(2.34)	(3.08)
Low-income to		-15.79	-0.98	1.36	-0.01	0.05		-0.33		.861	2.05	0.11
	non-oil developing	(1.86)	(2.86)	(2.10)	(0.13)	(1.28)		(5.90)
Middle-income to		-39.50	-1.39	2.84	-0.12					.980	1.98	0.06
	non-oil developing	(3.45)	(2.86)	(3.38)	(2.26)
Major exporters of		-13.04	-0.37	0.85	0.10	0.10	-0.30			.996	2.19	0.04
	manufactures to non-oil developing⁴	(3.69)	(0.36)	(3.39)	(5.47)	(5.36)	(1.51)
Net oil exporters to		-27.11	-1.77	1.94	-0.01				0.26	.968	2.25	0.05
	non-oil developing	(2.30)	(3.31)	(2.25)	(1.60)				(3.67)

^¹Corrected for second-order autocorrelation ρ₁ = –.961 (3.67); ρ₂ = –.513 (1.89).

^²Corrected for first-order autocorrelation ρ₁ = .444 (1.73).

^³Estimated over the period 1972–81.

^⁴Corrected for first-order autocorrelation ρ₁ = –.511 (2.26).

In Table 1, the estimated coefficients on the real effective exchange rate suggest that a sustained devaluation of the manufacturing exporters and the net oil exporters relative to domestic competitors and third-country competitors would contribute to an increase in their exports. These increased exports would arise from an increase in both the demand for and the supply of exports.

The estimated coefficients on the real effective exchange rate for major exporters of manufactures to each of the three markets are all less than unity in absolute terms. By contrast, the estimated coefficient on the real effective exchange rate for the net oil exporters is greater than unity in each of the three markets, perhaps reflecting the lack of trade barriers imposed on oil products and the ability of importing countries to find domestic resources to substitute for imported oil.

For the low-income and middle-income exporting groups, the weighting scheme used to calculate the real effective exchange rate is simplified in two ways. First, since competition in third markets is relatively unimportant for most primary producers, it is eliminated so that only domestic competition is taken into account, and δ is given a value of zero in equation (7). Second, when the market is the industrial and oil-producing countries, the primary commodities index in U.S. dollars was used to represent the price in the importing country—(PD_q in equation (7)—because for these groups the importing country offers little domestic competition to imports. Thus, for exports from low-income and middle-income countries to markets in the industrial and oil-producing countries, the real effective exchange rate takes into account one price on the demand side and, on the supply side, the competition among producers of primary commodities. The size of the estimated coefficients on the real effective exchange rate for the low-income and middle-income country groups is, in general, smaller than the sizes of the coefficients for the other two groups. The demand for primary products is generally less price elastic than the demand for manufactured products, and the difference in the coefficients between these two sets of groups reflects this fact.

These measures of the sensitivity to the real effective exchange rate must be viewed with caution. The variable is based on the nominal exchange rate, the consumer price index, and the weighting scheme described in equation (7). In the equations for the exporters of manufactures and net oil exporters the consumer price index is also used as a proxy for the export price because alternative indices were unavailable. Thus for these groups the real effective exchange rate reflects third-country competitor domestic prices rather than export prices in competitor countries.

The principal explanatory variables for exports from non-oil developing countries are GNP (or GDP) in the importing groups, whose coefficients range from 0.51 to 2.91. Exports from major exporters of manufactures show the greatest sensitivity to short-term fluctuations in industrial country markets, followed by exports of middle-income countries to non-oil developing country markets. Exports from middle-income countries and net oil exporters to oil-producing countries are less responsive to short-term fluctuations in demand. Total non-oil developing country exports show the greatest sensitivity to short-term fluctuations in GNP in industrial country markets (2.39), followed by non-oil developing country markets (1.57) and oil-producing country markets (1.52). Exports of major exporters of manufactures show the greatest sensitivity to short-term fluctuations in all markets, followed by net oil exporters, middle-income countries, and low-income countries. These elasticities are presented in Table 2.

Table 2.

Developing Countries’ Elasticities of Real Exports with Respect to Real GNP in Industrial, Oil-Producing, and Non-Oil Developing Countries, 1967-81

^¹The weights of each importing group’s market in each exporting group’s exports in 1980 were used to obtain this total elasticity.

^²The weights of each exporting group’s exports in total exports in 1980 were used to obtain this total elasticity.

Table 2.

Developing Countries’ Elasticities of Real Exports with Respect to Real GNP in Industrial, Oil-Producing, and Non-Oil Developing Countries, 1967-81

	Group	Industrial Countries	Oil-Producing Countries	Non-Oil Developing Countries	Exporting Group’s Exports to All Markets¹
Net oil exporters		1.97	0.55	1.94	1.92
Net oil importers
	Major exporters of manufactures	2.91	1.88	0.85	2.25
	Low-income countries (excluding India and the People’s Republic of China)	1.28	1.37	1.36	1.32
	Other net oil importers	1.42	0.51	2.84	1.71
Total non-oil developing country exports to each market²		2.39	1.52	1.57	2.01

^¹The weights of each importing group’s market in each exporting group’s exports in 1980 were used to obtain this total elasticity.

^²The weights of each exporting group’s exports in total exports in 1980 were used to obtain this total elasticity.

Table 2.

Developing Countries’ Elasticities of Real Exports with Respect to Real GNP in Industrial, Oil-Producing, and Non-Oil Developing Countries, 1967-81

	Group	Industrial Countries	Oil-Producing Countries	Non-Oil Developing Countries	Exporting Group’s Exports to All Markets¹
Net oil exporters		1.97	0.55	1.94	1.92
Net oil importers
	Major exporters of manufactures	2.91	1.88	0.85	2.25
	Low-income countries (excluding India and the People’s Republic of China)	1.28	1.37	1.36	1.32
	Other net oil importers	1.42	0.51	2.84	1.71
Total non-oil developing country exports to each market²		2.39	1.52	1.57	2.01

^¹The weights of each importing group’s market in each exporting group’s exports in 1980 were used to obtain this total elasticity.

^²The weights of each exporting group’s exports in total exports in 1980 were used to obtain this total elasticity.

Output, measured by deviation from trend, was included in the supply equations of the developing countries to capture the effects of domestic recessions or booms on exports. One problem with including output is that it is not independent of GNP in the importing countries, or of exports in the supplying countries; its inclusion therefore makes it difficult to interpret the value or significance of the regression coefficients accurately. This problem was particularly severe for the net oil exporters, and consequently output was dropped from the equations for this exporting group. It was also excluded from the equations for the low-income and middle-income groups because the concept is not particularly meaningful for producers of primary commodities.

In the equations for exporters of manufactures, the inclusion of output (measured by deviation from trend) does not change the size of the coefficients on the other variables. Furthermore, the sign of the coefficient is negative for all three market groups, although not significant at the 95 percent level. The size of the coefficient for the oil-producing group is much larger than the size of the coefficients for the other two importing groups. Thus, as domestic output rises among the major exporters of manufactures, much of the additional exports may go to the oil-producing countries because of the lack of trade barriers against non-oil developing countries in that market.

In the specification of the model, the time trend (t₁) was included to represent long-run factors that affect both the demand and supply of exports. The estimated coefficients for the time trend are negative for most of the equations. However, for the manufacturing exporters the estimated coefficients are positive and highly significant for two of the three importing groups. The change in economic structure that produced the high growth rates in domestic production of manufactures also produced high export growth rates. This change was probably brought about by increases in the capital stock, which would give a positive coefficient on the supply side of the trend variable. Furthermore, the manufacturing exporters experienced large increases in demand from all three importing groups between 1967 and 1981.¹⁰ The equation for exports from the major exporters of manufactures to the oil-producing group reflects the same trend increases in demand and supply.

The negative coefficient on the trend variable for the manufacturing group’s exports to industrial countries does not conflict with the above results, since the large increase in these exports may have coincided with shorter-run declines in GNP in the industrial countries. The estimated negative coefficient in the equation here is thought to reflect the growing curtailment of manufactured imports from the non-oil developing countries that has taken place in the industrial countries over the 1970s.¹¹ The positive coefficient on the time trend for low- and middle-income countries’ exports to the oil-producing countries reflects the huge structural changes in OPEC import growth over the 1970s. The second time trend (t₂) was included to represent structural changes in non-oil developing countries’ economies that took place in 1970-71.

The dummy variables were included to represent the effects of the two oil crises—1973-74(DOIL 1) and 1979-80(DOIL 2)—on non-oil developing country exports. The oil crisis dummy has a negative coefficient for the exports of the middle-income group to industrial countries and for the exports from the low-income group to non-oil developing country markets; these negative coefficients show the deleterious effect that higher oil prices have on non-oil developing country exports by increasing their production costs. Exports of net oil exporters to industrial and non-oil developing country markets increase after the oil price rise associated with the second oil crisis. This increase reflects the change in suppliers made by some industrial and non-oil developing importers following the second oil crisis and also explains the fall in net oil exporters’ exports to the oil-producing importers that took place after the second oil crisis.

IV. Conclusions

Economic developments in the non-oil developing countries over the past decade or so have been dominated by the need for export earnings to achieve a sustainable current account and, in some cases, to support the import-substitution policies adopted by these countries in the late 1950s and the 1960s. The difficulties many of the non-oil developing countries have faced in recent years arise from the fall in world demand for their products, at a time when domestic policies that had turned relative prices against the export sector were beginning to take effect. This paper has analyzed the impact that these two important events have had on the exports of the non-oil developing countries.

To facilitate a quantitative assessment of the effects of growth in industrial countries, real effective exchange rate changes, and output growth in the domestic economies on the exports of non-oil developing countries, a model explaining the volume of exports from these countries was estimated. In estimating the volume of exports flowing from the non-oil developing countries to their market countries, seven groups of countries were distinguished—four exporting groups and three importing groups—and a distinction was made between the responsiveness of exporting groups both to short-term fluctuations and long-term developments.

These non-oil developing countries were grouped to answer more broadly based policy questions than would be possible from a model based on an individual developing country. Examples of the type of policy questions that can be answered from this analysis are: by how much does devaluation by a group of exporting countries increase their exports; and by how much do changes in GNP in importing countries alter the exports of groups of non-oil developing countries. The empirical evidence demonstrates that the real effective exchange rate, GNP in importing countries, and output in exporting countries (measured by deviations from trend), as well as long-term developments in both exporting and importing countries, all play an important role in the determination of exports of groups of non-oil developing countries. In general, the exports from non-oil developing countries are strongly influenced by real effective exchange rate changes, which indicates that exchange rate policy in the non-oil developing countries as a group should be successful in promoting export growth through both the demand for and the supply of their products. Short-term fluctuations in GNP in the industrial countries appears to have a greater impact on exports from non-oil developing countries than short-term fluctuations in GNP in the two other importing groups.

Finally, no discussion of developing country exports would be complete without highlighting the longer-term structural developments that have taken place in both importing and exporting countries. On the demand side, there is no doubt that the share of exports from non-oil developing countries in the industrial countries’ imports of manufactures has grown considerably. However, the measures taken in the industrial countries and the non-oil developing countries to curtail imports probably had a detrimental impact on non-oil developing country exports. By contrast, the longer-run developments in markets in the oil-producing group have had a beneficial impact on non-oil developing country exports.

APPENDIX I: Classification of Countries

The classification of industrial and oil exporting countries adopted in this paper is the same as the one adopted by the Fund in December 1979 and used in the International Financial Statistics and the World Economic Outlook (International Monetary Fund (1983)).

Non-Oil Developing Countries

The four sample exporting groups of non-oil developing countries distinguished in the paper are subgroups of the WEO classification of the same groups.

APPENDIX II: Variables and Data Sources

Definitions of the Variables in the Model

E_p Index of country p’s local currency per U.S. dollar (1980 = 100)

GDP_p Index of country p’s domestic output (1980 = 100)

GDPT_p Index of country p’s potential domestic output

GNP_q Real GNP in country q (in billions of U.S. dollars and in 1980 market prices)

MV_q Volume of imports of country q (in billions of 1980 U.S. dollars)

P_p or P_s Consumer price index for country p or country s in local currency (1980 = 100)

PCI Index of primary commodities, in U.S. dollars (1980 = 100)

PX_p Export price index for country p, in local currency (1980 = 100)

XV_pq Volume of exports from country p to country q (in billions of U.S. dollars and in 1980 prices)

Data Sources

International Monetary Fund, Direction of Trade Statistics, various issues; International Financial Statistics: Supplement on Trade Statistics, various issues; and Fund staff estimates.

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Bond, Marian E., “Agricultural Responses to Prices in Sub-Saharan African Countries,” Staff Papers, International Monetary Fund (Washington), Vol. 30 (December 1983), pp. 703–26.
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An economist in the Developing Country Studies Division of the Research Department, Marian Bond is a graduate of the University of Essex and of the London School of Economics and Political Science. She was formerly a member of the faculty of the University of Reading, England.

These are the former “analytical subgroups” in the World Economic Outlook studies of the International Monetary Fund (1983). In the 1985 World Economic Outlook, these groups are referred to as “alternative analytical groups.” (See Appendix I for a list of these countries.)

The small country hypothesis is acceptable for many, but by no means all, non-oil developing countries. For example, coffee exports from Brazil and copper exports from Zaire constitute a sizable proportion of the total market for those exports.

Houthakker and Magee (1969) use an index of GNP of 26 importing countries, and Khan (1974) uses real world income (real GNP in industrial countries) to represent income in importing countries.

The development of a more elaborate methodology for calculating a nominal or real effective exchange rate index for an individual developing country can be found in Bélanger (1976), Ridler and Yandle (1972), and Feltenstein, Goldstein, and Schadler (1979).

These exporting and importing groups are defined in Section III.

This term will also pick up changes in tastes or long-run barriers that affect the relative demand for imports from different groups of developing countries.

Export supply is also heavily affected by official price-incentive policies, tax and trade policies, and other measures, and by the long gestation periods required for certain products before increased output can occur. Where possible, these effects are captured by a dummy variable.

If country p is small, then all of the effects of a devaluation will come from the supply side.

The volume of exports from exporting group i to importing group j are summed over the p exporting and q importing countries in the following way:

1 n = {X V}^{i j} = Σ_{p}^{m i} Σ_{q}^{n i} 1 n {X V}_{p q} .

The real effective exchange rate, GNP, and output from deviations variables are summed in the same way:

\begin{matrix} 1 n {R E E R}^{i j} = δ \cdot Σ_{p}^{m i} β_{p}^{j} Σ_{q}^{n i} θ_{p q} 1 n (P D_{p} / P C_{q}) + (1 - δ) \cdot \underset{p}{Σ} β_{p}^{j} \underset{q}{Σ} θ_{p q} 1 n (P D_{p} / P D_{q}) & (7) \end{matrix}

\begin{matrix} 1 n {G N P}^{j} = \underset{a}{Σ} G N P_{q} \\ 1 n {Q T}^{j} = \underset{p}{Σ} {Q T}_{p} . \end{matrix}

The weight βⁱ is the share of exporting country p in the jth importing group, namely $β_{p}^{j} = {X V}^{j} / Σ {X V}^{j},$ and the weight θ_pq is the share of importing country q in the total imports of the group, namely $θ_{p q} = {X V}_{p q} / Σ {X V}_{p q} .$

Equations were also run using a market share approach, and the estimated positive coefficients obtained on the trend term for these equations support this claim.

From the early 1970s, the industrial countries adopted a series of piecemeal measures to curtail imports of textiles, clothing, footwear, electronics, steel, and ships (among other items). For example, a multifibre agreement negotiated in 1973 and extended to the end of 1981, limited annual export growth rates from developing countries to 6 percent. With the onset of the 1975 recession, imports of other items began to be curtailed.

Hong Kong is a dependent territory.

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IMF Staff papers: Volume 32 No. 1

Author:

International Monetary Fund. Research Dept.

Volume/Issue:: Volume 1985: Issue 001

Publisher:: International Monetary Fund

ISBN:: 9781451956696

ISSN:: 1020-7635

Pages:: 195

DOI:: https://doi.org/10.5089/9781451956696.024

Keywords
REFERENCES

	Industrial Countries
Australia	Germany, Fed. Rep. of	New Zealand
Austria	Iceland	Norway
Belgium	Ireland	Spain
Canada	Italy	Sweden
Denmark	Japan	Switzerland
Finland	Luxembourg	United Kingdom
France	Netherlands	United States
	Oil Exporting Countries
Algeria	Kuwait	Qatar
Indonesia	Libyan Arab Jamahiriya	Saudi Arabia
Iran, Islamic Rep. of	Nigeria	United Arab Emirates
Iraq	Oman	Venezuela

	Industrial Countries
Australia	Germany, Fed. Rep. of	New Zealand
Austria	Iceland	Norway
Belgium	Ireland	Spain
Canada	Italy	Sweden
Denmark	Japan	Switzerland
Finland	Luxembourg	United Kingdom
France	Netherlands	United States
	Oil Exporting Countries
Algeria	Kuwait	Qatar
Indonesia	Libyan Arab Jamahiriya	Saudi Arabia
Iran, Islamic Rep. of	Nigeria	United Arab Emirates
Iraq	Oman	Venezuela

	Low-Income Countries
Bangladesh	Pakistan	Tanzania
Kenya	Sudan	Zaϊre
Madagascar
	Middle-Income Countries
Cameroon	Guatemala	Romania
Chile	Ivory Coast	Thailand
Colombia	Morocco	Turkey
Ghana	Philippines	Zambia
	Major Exporters of Manufactures
Argentina	Israel	South Africa
Brazil	Korea, Rep. of	Yugoslavia
Greece	Portugal
Hong Kong¹²	Singapore
	Net Oil Exporters
Ecuador	Mexico	Syrian Arab Republic
Egypt	Peru	Tunisia
Malaysia

	Low-Income Countries
Bangladesh	Pakistan	Tanzania
Kenya	Sudan	Zaϊre
Madagascar
	Middle-Income Countries
Cameroon	Guatemala	Romania
Chile	Ivory Coast	Thailand
Colombia	Morocco	Turkey
Ghana	Philippines	Zambia
	Major Exporters of Manufactures
Argentina	Israel	South Africa
Brazil	Korea, Rep. of	Yugoslavia
Greece	Portugal
Hong Kong¹²	Singapore
	Net Oil Exporters
Ecuador	Mexico	Syrian Arab Republic
Egypt	Peru	Tunisia
Malaysia

	Low-Income Countries
Bangladesh	Pakistan	Tanzania
Kenya	Sudan	Zaϊre
Madagascar
	Middle-Income Countries
Cameroon	Guatemala	Romania
Chile	Ivory Coast	Thailand
Colombia	Morocco	Turkey
Ghana	Philippines	Zambia
	Major Exporters of Manufactures
Argentina	Israel	South Africa
Brazil	Korea, Rep. of	Yugoslavia
Greece	Portugal
Hong Kong¹²	Singapore
	Net Oil Exporters
Ecuador	Mexico	Syrian Arab Republic
Egypt	Peru	Tunisia
Malaysia

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Abstract

I. Review of the Literature

II. Structure of the Model

Export Demand Equation

Export Supply Equation

Reduced Form

Aggregation

III. Empirical Results

IV. Conclusions

APPENDIX I: Classification of Countries

APPENDIX II: Variables and Data Sources

Data Sources

REFERENCES

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