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xr-. i *Another study with similar results is Yotopoulos and Nugent (1977) in which the argument was further analyzed in support of the insignificant effect ofexport instability on economic growth. They used
a different set of instability indices that involved weighting, defined as
ratios of trend corrected variations of foreign market instability for various commodity classes of export goods. The explanatory variables
used were ratios of the corrected trends to explain foreign demand
fluctuations and domestic consumption to exports.
Lam (1978) analyzed the relationship between export instability
and economic growth and found that there exists a positive and significant association between them. His approach of trend analysis
was important as he affirmed that export instability is associated in general with the rates of export earnings in West Pacific countries. His findings differed sharply from previous studies as he claimed that previous studies failed to account for the rate and direction of export fluctuations over time.
This positive relationship was also examined by Savvides
(1984)
on a sample of Asian countries which had a large
proportion of their
exports receipts derived from primary
commodities.
Heused
anintertemporal
current account model (ICA)that considered
asmall developing
country with asingle composite commodity not domestically
produced, deriving alifetime innovation variance term in
export earnings.
44
The results showed that a positive relationship occurs when countries respond to export instability by reducing consumption levels. This
process if repeated over a period of time increases savings and hence the rate of investment.
The following studies have demonstrated the negative effects of export instability on the supply ofoutput and other linkage effects on the economy of LDCs.
Voivodas (1973) did a study focusing on the subject of whether export instability has a detrimental effect on the level of investment for primary producing countries. His study took into account the premise put forward by Hawking, Epstein and Gonzales (1966) which states that, "fluctuations in export receipts of developing countries tend to
cause similar fluctuations in the ability to import because
international reserves of under-developed countries are limited and
because aid and investment from advanced countries are not
necessarily compensating. If, as a result, imports essential for development are forced to fluctuate, development will be unstable, if
not retarded, and a steady progression to sustained economic
growth
will be made extremely difficult."
He investigated two hypotheses based on
this relationship.
First, he examined how the level of exports and foreign capital
inflows
were related to the level of domestic investment through the dependence of the latter on capital goods imports
which
arein turn
45
financed by foreign exchange receipts. Second, in relation to the rate of growth of output, he introduced a variable for exports, foreign capital inflows and a measure of export instability into the same argument. The instability index was defined as the standard error of estimate derived from the linear regression on time for both the export and foreign capital inflowvariables.
The regression results obtained from the study indicate that export instability tends to be negatively correlated with the rate of growth of primary producing countries' total product, while no
significant relationship was obtained between the instability of foreign capital inflow and the rate of growth of total product. This result was
regarded to be consistent with a direct relationship between the change of export receipts and that of domestic product as specified by
a foreign trade multiplier formulation.
The more recent studies conducted by Glezakos (1984),
Gyimah-Brempong
(1991) and Fosu (1992) all used the derivedinstability
index as a measure of the level of volatility of exports intheir growth equations. Gyimah-Brempong and Fosu in particular
moved away from the general structural growth models to the use of
an aggregate production function that included not only the
neoclassical production inputs of capital and labor but also exports as
an explanatory variable.
46
Glezakos (1984) conducted his study to determine the effects of export instability on economic growth and the growth of exports, for a
sample of 10 primary producing less developed countries. His primary objective was to determine and evaluate the relative importance of export price and export quantity effects on economic growth.
He derived an instability index which was the arithmetic mean ofthe absolute values ofyearly changes in a times series corrected for
the trend and expressed as a percentage of the average of total
observations. He regressed real per capita income growth rate on
export instability, and his results showed a significant negative effect
on real per capita income growth rate.
This variable was used instead of the income growth rate to
avoid methodological errors of variable distortions in comparison with
studies like Coppock (1962). He went on further to verify the
argument that export instability inhibits economic growth even via its
detrimental effects on the growth of exports. To support his argument
he showed the relationship between export instability and
the growth
rate ofexports, as well as that between the growth rate of exports
and
the income growth rate. His results supported
the hypothesis that
price instability acts as a more serious