Empirical Reviews

Khan (1974) provided estimates of import demand for 15 developing countries and to test the hypothesis that changes in priees of traded and non-traded goods exert any significant influence on the trade flows of these countries. He also made an attempt to demonstrate how the role of quantitative restrictions on trade can be approximated and incorporated into estimates. This he claims is neeessary because on the import side of trade accounts, controls have been regarded as commonplaee in developing countries. Although the precise role of quantitative restriction may actually be non quantifiable, Khan tried to show that under certain assumptions, approximations are possible and tests can be made to evaluate the importance of controls on trade. The 15 countries Khan studied are Argentina, Brazil, Chile, Columbia, Costa Rica, Ecuador, Ghana, India, Morocco, Pakistan, Peru, the Philippines, Sri Lanka, Turkey, and Uruguay. The period covered by the study was 1951-69 on an annual basis.

Khan first specified import demand as a log-linear function of real gross domestic product and the ratio of import priees to domestic priees. Next, to take account of the possibility of behavior

out of equilibrium, he specified a partial adjustment mechanism for imports in which the change in imports is related to the difference between the demand for imports in period t and actual imports in period t -1. Th us, his disequilibrium import demand equation included lagged import demand as an explanatory variable. In order to account for the role of quantitative restrictions, Khan assumed an autoregresive term in the error term and considers the coefficient of autocorrelation as an indicator of restriction. He therefore estimated the import demand equation in equilibrium and out of equilibrium subject to the errors following a first-order autoregressive process using Iwo-Stages Least Squares.

The equilibrium results for 11 of the 15 countries show that the estimated priee elasticities are generally high and therefore indicate that relative priees have a significant effect on the imports of developing countries. In 9 of the 15 countries studied the estimated incarne elasticities are significantly different from zero at the 5 per cent level and have positive signs. The coefficient of autocorrelation is significantly different from zero at the 5 per cent level for 8 countries. The disequilibrium estimated short-mn priee elasticities are significantly different from zero and have the correct signs for 6 countries. The estimated coefficient of lagged imports was significant for ali countries with the exception of Chile.

Khan's results showed that a simple equilibrium formulation appears to be adequate for the import demand of these countries appear to adjust within a year. He concluded that priees play an important role in the determination of imports in developing countries. The high estimated priee elasticities of his results imply that in a number of developing countries the Marshall-Lemer condition for successful devaluation would be easily satisfied. Although Khan's result

were good in general, he conceives that his results could be improved considerably if special features of the countries such as their state of development or trade structure characteristics as well as special circumstances during the period of study were incorporated into the equations.

Khan also ignores the impact of foreign exchange constraints faced by these countries.

William Hemphill (1974) questions the validity of the assumption of no foreign exchange constraints faced by developing countries and therefore sought to determine the effect of foreign exchange receipts on the import behavior for eight developing countries. The countries are Argentina, Burma, Chile, China, Columbia, El Salvador, India and Thailand and the sample range is 1948-70.

Hemphill specified his import function as a linear relationship between cunent and past values of foreign exchange receipts and international reserves. This specification, he justified based on the fact that developing countries demand for foreign exchange far exceed supply at the existing exchange rate and that the stock of reserve assets of these countries are relatively small.

Secondly, he daims that imports of these countries mainly constitute capital goods and maintenance items for which there are no adequate domestic substitutes. Finally, Hemphill argues that if restrictions are used to limit imports, there will be a tendency for imports to determine output rather than the reverse particularly in the manufacturing sector.

His findings validate his hypothesis that foreign exchange receipts and international reserves are the chief determinants of imports in developing countries. However, this mode! is exposed to

biases that are likely to arise due to omission of relevant variables as income and priees are not incorporated into the model.

Khan (1975) studied the behavior of imports of Venezuela at both the aggregated and disaggregated levels during the period 1953-1'972. The nine disaggregated categories cover sorne 80% of total Venezuelan imports and are, agricultural products, food, textiles, chemical products, paper and cardboard, furniture, machinery, construction material, tobacco and beverages.

Khan specified import demand as a function of real GDP and the ratio of priee of the imported commodity to the priee of the domestic commodity. In estimating these import functions he assumed that importers are always on their demand curve and there is no possibility of

disequilibrium behavior. The lags in adjustment he assumed are shorter than one year so there is no need to include them in his specification. A dummy variable was also included in each equation to capture the special circumstances of the 1958-1961 period.

His results showed that except for imports of construction materials, and tobacco and beverages, ali other categories have priee elasticities that are significantly different from zero at the 5% leve! and have the expected negative signs. The estimated income elasticities are positive and significant in the equations for imports of agricultural products, chemical products, paper and cardboard, machinery, and tobacco and beverages. He obtained significantly negative income

elasticities for food and textiles imports. The goodness of fit measured by the R ² was found to be reasonably good for all equations exeept for imports of construction materials.

Khan' s results appear to support the view th at simple specifications involving only relative priee and incarne as explanatory variables are adequate to explain a large proportion of the variation in Venezuelan imports. This he found to be true at bath the aggregate as well as the disaggregated levels. He therefore concluded that the aggregate elasticity is simply a weighted sum of the individual elasticities. Khan's results are generally good but this study fail to consider foreign exchange constraints effect on imports and the assumption that importers are always on their long run demand schedules can be easily invalidated especially developing countries.

Agbonyitor (1986) examined the effect of imported capital and intermediate goods in the process of capital formation in 14 Sub-Saharan African countries. The countries are, Ethiopia, Ghana, Cote d'Ivoire, Liberia, Malawi, Niger, Nigeria, Senegal, Somalia, Tanzania, Togo, Zaire and Zambia⁷. He disaggregated import into four categories based on SITC classification. The categories were specified as follows;

• Food imports as a function of agricultural output and relative priees of imported food

• Imports of machinery and transportation as a function of gross domestic product and external earnings

• Petroleum imports as a function of gross domestic product and relative priees

• Intermediate goods as a function of industrial output and external earnings

Applying partial adjustment mechanism and using cross sectional data, Agbonyitor used OLS to estimate the elasticities of the various countries. In 7 of 10 cases, external earnings were fou nd to be significant determinants of imports of machinery and transportation. In 6 of 10 cases, external earnings were also found to be significant determinants of the importation of intermediate goods. Incarnes and priees were found to be significant in determining the imports of capital goods in 9 of 10 cases and in 6 out of the 10 cases for intermediate goods. The priee variable had the correct sign for food imports but the output elasticity was positive for sorne countries while negative for others. In ali 14 countries, the results of 10 were plausible for each equation. By desegregating, this study helps in prescribing specifie policies that will directly influence specifie import groups. However, given that the results vary between countries, Agbonyitor's findings cannot be universally accepted.

Bahmani-Oskooee (1986) attempts to provide new estimates of aggregate import demand functions for seven developing countries using quarterly data on the relevant variables for the period 1973-1980. He estimates directly priee and exchange rate response patterns for these countries namely, Brazil, Greeee, lndia, Israel, Korea, South Africa and Thailand. He specified aggregate import demand for these countries in its simplest formulation that relates the quantity of import demanded by a country to the ratio of imports priees to domestic priees and to domestic incarne but added an exchange rate variable. Suggesting that imports do not react instantaneously to their long run equilibrium level following a change in any of their

7 The period of study varied from country to country but was generally between 1962-83.

determinants he specified another import demand function that relates quantity demanded to income in period t and lagged values of relative priees and exchange rate.

Bahmani-Oskooee results show th at the estimated priee elasticities are generally low, indicating that relative priees do not have a significant effect on the imports of developing countries. Ali the estimated priee elasticities are less than unity, confirming the commonly expressed view that developing countries have a priee inelastic demand for imported goods. The estimated elasticities with respect to exchange rate were also found to be very low indicating that exchange rate does not have a significant effect on the imports of developing countries. Ail the estimated income elasticities were found to be significant at the 5 per cent level and have the positive signs except for Israel and India.

Bahmani-Oskooee concluded that in the short run imports react quicker to exchange rate changes than to priees but in the long run trade flows are more responsive to changes in relative priees than to changes in the exchange rates. Although these results are generally good they are exposed to biases associated with the omission of relevant variables as the effect of foreign exchange constraints on imports is ignored.

Kabir (1988) analyzes the effect of exchange rate changes on aggregate imports of Bangladesh by estimating import demand for the period 1973-83 using OLS. He specified import demandas a function of real income, priee index for domestic substitutes, priee index for imports, exchange rate,. international reserve (to account for import controls) and aids disbursed.

The inclusion of aids disbursed in the import demand equation is supported by the argument that a big portion of the aid received by developing countries is spent on imports from donor countries. He also incorporates a lagged import variable to account for adjustment time.

Kabir's results revealed that income elasticity of import demand in Bangladesh is greater than unity and has the expected positive sign. This contradicts the belief that developing countries have low-income elasticities. The estimated priee elasticity bas the expected sign but a value less than one implying a small response of imports to changes in relative priees. The international reserve and the foreign aid variables both have the expected positive sign and are significant. The coefficient of the lagged import variable was also found to be significantly different from zero implying a certain degree of dynamic adjustment.

Kabir therefore concluded that the level of import demand for Bangladesh's imports is priee inelastic and therefore, priee is not an important factor that can be manipulated to determine the import level. Exchange rates in this regard are of no use in influencing imports of Bangladesh. This result is not invariant with most studies done on developing countries trade flow. The inclusion of too many priee variables might have redueed the impact of priee on Bangladesh imports⁸.

8 See Goldstein and Khan (1985, pp 162) for the impact of including one too many priee variables in tracte equations.

Christian Moran (1989) also assessed imports under foreign exchange constraints for 21 developing countries during the period 1970-83· The countries are: Algeria, Argentina, Brazil, Chile, Columbia, Cote d'Ivoire, India, Indonesia, Kenya, Korea, Mexico, Morocco, Nigeria, Pakistan, Peru, Portugal, Senegal, Sudan, Thailand, Turkey and Yugoslavia.

He used pooled cross-section time series data arid combined the traditional variables (priees and incarne) and the Hemphill variables (foreign exchange reeeipts and international reserves) into his general madel. He estimated this general mode] by first assuming that priees are exogeneously determined and then allowing for government's attempts to limit import through domestic priees he estimated the same mode] with priees being determined endogenously.

Moran's results showed that for the general import madel with exogenous pnees ali the parameters have the expected signs and the foreign exchange reeeipts coefficient is quite significant. Relative priees were also found to be important but their significanee (measured by their corresponding t-values) is generally smaller than the significanee of foreign exchange receipts and international reserves. In estimating the second import madel, Moran performed a Wu-Hausman test and the results suggest that the traditional priee and incarne elasticity estimates are subjected to a bias when foreign exchange reeeipts are explicitly accounted for in import equations that assumes import volumes and priees are endogenous. However, when Two-Stage Least Squares technique was employed the results improved significantly.

Moran reaches two main conclusions. Firstly, import demand estimation in developing countries should account for endogeneity of priees, as governments will be tempted to influence domestic

priees when faced with foreign exchange restrictions. Secondly, although priees and income influence import behavior in developing countries significantly, foreign exchange constraints also play a critical role in determining imports as they strongly affect import volume. According to Moran, his model performs better than the traditional model or the Hemphill model.

However, the implicit dynamic structure of his model is too simple to capture the interaction between past and current level of import determinants.

Ramon Lopez and Vinod Thomas (1990) studied the impact of SAP on the imports of seven Sub-Saharan African countries (Cote d'Ivoire, Kenya, Madagascar, Nigeria, Tanzania, Zaire, Zambia) using annual data for 1966-86. They contend that SAP alters terms of trade causing shifts among absorption components (public and private investment and consumption) and exchange rate via devaluation. They also recognized that the bulk of Sub-Saharan African countries import (final and capital goods) have a more direct relationship with absorption rather than with incarne.

Lopez and Thomas estimated three import demand equations. In the first equation, the demand for imports was specified as a function of real GDP, absorption/GDP ratio, exchange rate and import priees. The second equation accounted for foreign exchange restrictions by incorporating the export/debt ratio. In the third equation, the structure of absorption was considered and import demand was expressed as a function of private consumption, government consumption, and real investment, exchange rate and import priees.

In six of the seven countries studied, the absorption coefficients were found to be positive and significant at 5% level. The coefficients of export-debt ratio in every country were found to be positive although insignificant for Nigeria and Zaire. They also revealed that on the average a

1-% reduction in absorption/GDP ratio is associated with a 2% decline in imports. The demand related variables remain significant when the foreign exchange availability variable is included.

Therefore, the authors concluded that aggregate import is jointly determined by both foreign exchange and demand factors. However, a simultaneous reduction in absorption and depreciation of exchange rate may lower imports during the adjustment process, as SAP are likely to increase the import/GDP ratio.

Although Lopez and Thomas model expands on Moran's work by considering the impact of SAP on import of developing countries, like Moran their model also impose a restrictive dynamic structure that cannot adequately capture the interaction between different levels of import determinants.

Umo (1991) in his analysis of Nigeria's trade with special reference to import demand examines the components of Nigeria's external trade in a development context. Using OLS for the period covering 1960-85 he estimated aggregate import demand and disaggregated functions of 6 categories of import. These are food and live animais, crude materials, machinery and transport equipment, chemicals, raw materials and mineral fuels. He then specified the aggregated and disaggregated functions of import demand as a function of relative priees, real per capita incarne and capital inflows to account for external influences on import.

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Umo's results for the aggregate import demand function showed that relative priees and per capita income significantly influences Nigeria's import as the estimates were statistically significant and were correctly signed. The external influence proxy was however statistically insignificant. The results for the disaggregated models were similar to that of the aggregate mode! except for a few cases. The behavior of the external influence on Nigerian imports seems unstable. It was found to be positively sighificant for chemical imports and negatively significant for mineral fuel imports. These results led Umo to conclude that Nigeria's demand is both priee and income inelastic confirming the existence of 'habit persistence' parameters.

Carmen Reinhart ( 1995) re-examines the role of relative priees in affecting trade and therefore, implicitly the effectiveness of devaluation policies in the light of the recent time-series literature that deals with variables that have unit root and no well-defined limiting distributions.

Her sample includes three African countries (Congo, Kenya, and Morocco), four Asian countries (Hong Kong, Indonesia, Pakistan, and Sri Lanka) and five Latin American countries (Argentina, Brazil, Columbia, Costa Rica, and Mexico). She specified her models in accordance with the traditional trade models but conducted the study in the light of inference problems associated with partial adjustment mechanism for the period 1970-93.

Acknowledging the fact that developing countries are highly indebted and facing foreign exchange constraints, Reinhart incorporated the debt stock in her model. She establishes time series properties of the relevant variables through the standard unit root test: Dickey-Fuller (DF) and Augmented Dickey-Fuller test (ADF). In most instances, she found that real import; real

GDP, exports/real GDP ratio and relative priees are integrated of the same arder. In the majority of the cases studied, relative priees and incarne were found to be sufficient in defining a steady state. This implies the variables are co-integrated with imports in a way predicted by theory.

In 11 of the 12 countries studied, relative priees were found to be significant and also having the expected sign. Priee elasticity es ti mates were however fou nd to be Jow, and in most instance Jess than unity. This implies that large relative priee swings are required to have an appreciable impact on trade patterns. Reinhart's conclusion was that, given the significance of relative priees to import behavior in developing countries, devaluation could be an effective tool in influencing trade in these countries.

Abdelhak Senhadji (1998) did a cross country analysis of the structural import demand

Abdelhak Senhadji (1998) did a cross country analysis of the structural import demand