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AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING INSTITUT AFRICAIN DE DEVELOPPEMENT ECONOMIQUE ET DE
PLANIFICATION (IDEP)
DETERMINANTS OF IMPORT DEMÂND IN SIERRA LEONE
A Dynaroic Specification
Submitted to the IDEP Training Division in partial fulfillment of the requirements for t:he a ward of the degree of Mas ter of Arts in Economie Polie y and Management
by
KA WUSU KEBBAY Thesis Committee Members
Chief Supervisor: Prof. Ahmadou Aly M'BAYE... . ... . Member: Prof. Moitrad LABIDI ...
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Member: Prof. Birahim Bouna
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DEDICATION
This thesis is dedicated to my wife Mrs. Nemata
Kawusu~KebbayBaby We Are Finally Getting
The
MASTERS
TRIBUTES
ALHAMDU LILAHI RABIL ALLAH MEEN
So many have helped lightened the load of this long journey. 1 am first and foremost grateful to the former director of IDEP Dr. Jeggan Senghor and the former Chief of training Dr.
Philip Quarcoo for aliowing me to complete the first half of the program even though 1 did not have sponsorship at the time. To the current director Dr. Samuel Ochola, 1 thank you for making the rest of the way smoother. 1 am greatly indebted to my chief supervisor Dr. Aly Amadou Mbaye for his insights and invaluable comments. The quality of this work is a reflection of his astute guidance, the mistakes are however entirely mine. To Dr. Bouna Birahim Niang 1 say a big thank you for ali the assistance rendered during the course work and the preliminary stage of this research. 1 am grateful to Professor Mourad Labidi for the interest he has showed in the progress of my work. 1 thank my external examiner Dr. Fodiye Bakary Doucoure for his econometrie insights and willingness to accommodate my demands at a short notice. A special thanks to Dr. G. Mwau for his initial comments on how not to proceed with a thesis research.
The completion of this thesis was only made possible because of the financial support 1 received from UNESCO. 1 am grateful to Dr. Alpha Wurie (Ministry of Education, Freetown) and Mr. B. Konneh (UNESCO,Freetown) for their recommendations to UNESCO. Mrs.
Abou.F-Shady and Merida Irwin of UNESCO (Paris), 1 thank you very much for the speedy response to ali my correspondence.
1 am grateful to ali IDEP staff that have contributed one way or the other in making my stay a pleasant learning experience. 1 am particularly grateful to Michael Nageri, James Arthur, Wilfred Amoako, Chiek Diop, Hawa S.Traore, Aby Kamara, Haja Raky Sarr, Michel Gubaka, Alphonse Sagna, Charles Barra, Adama Ndao, Mamadou Sy and most of all Salif Di allo.
1 thank my family and friends (to numerous to mention) for their unwavering support and encouragement during this tough time. To my colieagues, 1 say thank you for helping keep the faith. 1 reserve a special thanks to my mother who 1 cannot thank enough and beloved wife for being the wind beneath my wings.
TABLE OF CONTENTS
INTRODUCTION ... 1
1 Problem Statement ... 1
II Justification of Study ... 3
III Research Objectives ... 6
VI Hypothesis to be tested ... 6
V Organization of Study ... 7
CHAPTER ONE: Economie Background ... 8
1.0 Background ... 8
1.1 The Economy ... 8
1.2 Economie Decline ... 12
1.3 Structural Adjustment Poli ci es ... 14
1.4 The Effects of the Civil War ... 18
CHAPTER TWO: A Brief Literature Survey ... 22
2.1 Theoretical Background ... 23
2.1.1 The Perfect Substitute Model ... 23
2.1.2 The Imperfect Substitute Mode!.. ... 24
2.1.3 Choice of Variables ... 25
2.2 Empirical Reviews ... 30
2.3 Synopsis of Review ... 44
Chapter THREE: Methodology ... 45
3.1 Model Specification ... 46
3.2 Empirical Analysis ... 48
3.3 Co-integration Analysis ... 55
CHAPTER FOUR: Summary Concluding Remarks and Policy Implications ... 62
4.1 Policy Implications ... 63
4.2 Concluding Remarks ... 68
APPENDIX 1 Data Used in Regression ... 71
APPENDIX II Data Source and definition ... 73
APPENDIX 111. ... 74
Bibliography ... 75
4
INTRODUCTION
I Problem Statement
Given that trade has been postulated as an important determinant of economie development, Sierra Leone like most small open economiesïs heavily dependent on international trade. Upon the attainment of political independence, the Government embarked on import substitution industrialization (ISI) as a faster means to achieve economie development. This strategy was also seen as an avenue to reducing reliance on cash crops and a few minerais, namely, diamonds and iron ore. The first few years of the ISI development strate gy were successful as the economy grew at an annual average growth rate of nearly 4 percent. The international reserve was also healthy and the inflation rates low.
Ironically, to finance the ISI projects, the exports of cash crops and diamonds had to be intensified. The fall in the world priees of cash crops and the increase in smuggling activities of diamonds led to the eventual reduction in export revenues that could no longer meet the growing import requirements. The Government then started relying heavily on official foreign loans to finance the growing deficit. Consequently, substantial debt obligations were accumulated, leading to high inflation and the depletion of international reserves.
From tablel, it can be seen that an increase in trade deficit from US $6.7 to $131.7 millions corresponds to an increase in the external debt from US $68 to $369.3 between 1971-79. This is also accompanied by a quadrupling of inflation and a reduction in growth rates from almost 4%
to 1.8%. Given this trend, by 1985, borrowing could no longer finance the perennial deficit, Sierra Leone, therefore, became a candidate for structural adjustment. Structural Adjustment Programs (SAP) were first introduced in Sierra Leone in 1986 but was suspended a year later when the Government failed among other things to remove subsidies on rice (the staple food) and fuel.
Tablel. Selected Macroeconomie Indicators for Sierra Leone.
(Ali figures Expressed in Millions of US $ unless otherwise indicated)
Years 1971 1979 1989 1995
Imports 102.5 328.7 160.4 114.1 Exports 95.8 197.0 142.0 41.5 Trade Deficit 6.7 131.7 18.3 126.7 International 38.4 46.7 3.7 34.6 Reserve
GDP Growth 1962-70 1971-79 1980-89 1990-95
Rate% 3.9 1.8 0.47 -4.03
Inflation Rate 2.7 10.6 63.2 58.9
%
External Debt 68.5 369.3 1082.1 1143 Source: International FmancJal Statlstics. Vanous Years
2
However, in 1989, as part of an inspired IMF/World Bank initiative, tracte reforms were re- introduced as a cornerstone of SAP. Despite these liberal tracte and exchange rate policies introduced by SAP in 1986 and 1989 in Sierra Leone, the balance of payments position has worsened. The current account deficit has increased from US $59.7 to US$126.5 millions between 1989-95 and the GDP growth rate between 1990-95 averaged -4.03. Inflation rates have been oscillating around 60-80% and the total debt at the end of 1995 was in excess of US
$1 billion. The problem now is to find answers to the question 'why is the balance of payments position worsening despite attempts at reforms'? An obvious factor is the war but this alone cannot explicitly explain the import and export trends over the years. Answers to this question could only be found by conducting a study of balance of payments or its components.
II Justification of Study
The problems of the Sierra Leonean economy which manifested themselves m the 1980s in declining per capita income, rapid inflation and a severe external payments problem has a straightforward explanation. At independence the economy's prosperity was based on the boost in the export sector fueled by the mining sector. While these ex ports grew, the economy prospered, when they began irreversible decline, prosperity changed to stagnation and then to decline. Given Sierra Leone's dependency on international tracte the need for the reversai of the import and export trends cannot be overemphasized. Also, according to Harberler (1965) developing countries' best chance to arresting external imbalances lies in correcting the deficit in the international tracte in commodities. Achieving this requires a clearer understanding of the merchandise import and export flows in developing countries. This will help immensely in the
prescription and implementation of policies geared towards import contraction, export expansion or a combination of both.
However, it has been observed by most studies done on developing countries [see for example Bond (1985, 1987), Bahmani-Oskooee (1986) and Mirakhor and Montiel (1987)] that given weak external demands, protective barriers ·in industrialized countries and a fragile or non- existence industrial base, export cannot be expanded in the short run. Mirakhor and Montiel (1987) also observed that for a variety of reasons, the brunt of the adjustment burden over the past years has fallen on imports. Import contraction especially given the foreign exchange constraints faced by developing countries like Sierra Leone has become very important.
To control import, its determinants must be identified and isolated so that their impact on import demand can be fully assessed. Although severa! attempts have been made to study the determinants of import demand in developed and developing countries, the results cannot be universally accepted. This is because, the specifie variables that are Iikely to determine import in developed countries will be different in the case of developing countries. In instances when the determining variables are identical, the magnitude of their impact on import demand will most likely be different. In the case of studies done on developing countries, accepting the results universally will also be misleading, as country specifie characteristics are not incorporated into the functions prior to estimation. Also, with the exception of studies done on Asian economies, the studies on developing countries have mostly ignored the stationary property of the data. A country specifie study that accounts for the stationary property of the data is therefore required for Sierra Leone.
4
Also, a genuine fear is that if the import and export trends are not reversed the wrong message that 'liberal tracte does not work for Sierra Leone' will be sent to the Government and the private sector. The acceptance of this perception willlead to economie suicide for a country, which is already at the brink of collapsing. Especially, given the fact that severa! studies have shown that by implementing liberal tracte and exchange rate policies, a number of developing countries have been able to attain higher material standards of living with better health and longer life 1• More importantly, given the rate of globalization, protectionist policies that were successful in the 1960s and 1970s are bound to fail at this point in time. Now that the complete cessation of rebel activities and peace can be envisaged in the near future, salvation of the Sierra Leone economy rests on the implementation of measures tha,t will reduce the burden on the balance of payment, help control inflation and reduce the debt burden. Once these are achieved, growth and sustainable development could no longer be a dream. This study is justified as a step towards finding answers to the balance of payments problems faced by Sierra Leone. It is prudent, that an independent research be conducted that will explicitly examine the determinants of import demand in Sierra Leone. This will in no small way help in prescribing policies that will aid the successful implementation of import contraction policies. Thus, the need for this study.
1 See World Bank (1991)
III
Research Objectives
The. main objective of this study is to identify the main determinants of import demand in Sierra Leone. The research will be carried out with the following specifie objectives in mind:
• To empirically determine if the traditional import demand function with only priee and income variables significantly account for import demand in Sierra Leone during the period of study.
• To validate the view that foreign exchange constraints significantly influence import demand in Sierra Leone.
• To determine the effect of money supply on import demand in Sierra Leone.
• To determine whether the variables that mostly explains the variation of import demand in Sierra Leone are co-integrated with each other.
VI Hypothesis to be tested
In line with the objectives of this study, the following hypotheses will be tested:
• Changes in import demand in Sierra Leone cannot be explained by priees and income variables only
• Foreign exchange constraints significantly affect import demand in Sierra Leone
• Money supply positive! y influence import demand in Sierra Leone
6
V -Organization of Study
The rest of the study is organized into four chapters. Chapter 1 provides the economie background to Sierra Leone and gives a detailed overview of the current economie situation. Chapter 2 deals with the literature review. This covers a brief theoretical and empirical review of the determinants of import demand. Chapter 3 discusses the theoretical framework of the mode! specifications, empirical analysis and interpretation of results. The fourth chapter presents policy implications and concluding remarks.
CHAPTER ONE: Economie Background
1.0 Background
Sierra Leone is one of the smallest countries in West Africa with an estimated population of four million and a land area of approximately 72,000 squares kilometers. The country is endowed with rich mineral deposits, abundant off shore fishing and very fertile soil but yet, is one of the poorest in the world. At the time of attainment of lndependence, there was much expectation that this country, which had inherited an efficient civil service, would act as a mode! of economie progress and democracy in Africa. Indeed, Sierra Leone became the first country in Africa to vote out an unpopular government in 1967, when the regime of the Albert Margai was narrowly defeated by Saika Steven's Ali Peoples' Congress2.
1.1 The Economy
The economy of Sierra Leone IS characterized by the a large rural sector dominated by agriculture and mining activities and a small urban sector comprising of informai trading and artisanal activities and a simplistic financial sector. The manufacturing sector remains small and accounts for less than 10 percent of the value of total output. The illegal import of sorne manufactured goods continue to be a problem, especially cigarettes which are smuggled from Guinea.
2 The actual handing over of power was interrupted by a Military Coup: See Cartwright, JF, Poli tics in SietTa Leone:
1947-67' Toronto University Press, 1970.
8
The financial system comprised of the Central Bank (the Bank of Sierra Leone (BSL), four commercial banks3, the national development bank, the post office savings bank and ni ne small rural banks. There are eight insurance companies with the largest being the state owned National Insurance Company (NIC). Excess liquidity held by most commercial banks bas restrained secondary market development and inter-bank market is limited mostly to rediscounting of treasury bills by the Central Bank. The BSL conducts weekly auctions of 90-day treasury bills and periodic auctions of one year bearer bonds as means to targeting the growth of broad money.
The agricultural sector although largely underdeveloped is seen as the backbone of the economy since it employs the majority of the population in low-productivity, labor-intensive farming and
accounted for 40 percent of GDP in 1991. About 85 percent of the land area in Sierra Leone is arable for bath cash crops and food production and there is forestry products and fisheries within the agricultural sector. Rice, being the staple food, is the most important food crop and is grown by 80 percent of the farmers in almost every part of the country. lts production declined from an estimated 630,000 tons in the second half of the 1970s to 500,000 tons in 1990. Even though there is considerable potential for increased production, yields have remained low averaging 600 kg per acre of upland rice and 1300 kg per acre for swamp rice. To meet effective demand, rice imports have been between 50,000 to 90,000 tons annually since the late 1970s.
The main cash crops for export are coffee, cocoa and palm products. The annual production of coffee and cocoa are very low- 290,000kg for coffee and 140,000 kg for cocoa. While they are mostly grown in the eastern and southern parts of the country, palm products come from almost
3 Currently the four commercial banks are Rokel Bank (formerly Barclays Bank), Standard Chartered Bank, the
every part of the country but their experts have fallen drastically. Experts of coffee and cocoa stagnated in 1994 and 1995 because of sporadic attacks on the export routes to Freetown and the closure of the border to Guinea through which the remaining products are exported.
Fish provide about 75 percent of animal protein intake for the country. It is estimated that 120,000 tons of pelagie species, 2,500 tons of shrimps, 15000tons of tuna and 18,000 tons of demersal species could be exploited annually without damage to the resource base. Aquaculture is not widely practiced but it is estimated that an additional 16,000 tons of fish could be obtained from inland fishing annually4. Fisheries resources could potentially be the mainstay of the economy. Y et, according to the World Bank, Sierra Leone has in recent years been loosing more than $30 million a year to poachers. To increase surveillance and improve collection efforts, the
Peoples' Republic of China donated two additional patrol boats to the naval wing of the armed forces. This has significantly improved surveillance but the full potential of the fisheries industry is yet to be exploited. The Ministry of Marine resources estimated that the coastal waters can sustain up to 120 boats but only 70 boats are legally fishing in Sierra Leone's exclusive economie zone.
The mining sector comprises of a capital-intensive enclave and a substantial small-scale alluvial operations. Due to the rich endowment of iron ore, rutile, diamonds, gold and chromite, this sector is the most important source of foreign exchange and it accounted for 80 percent of official foreign ex change earnings in 19895. Diamond is the largest exported commodity and is
Sierra Leone Commercial Bank and the Union Trust Bank (fm·merly Meridien BIAO Bank)
4 National Seminar Report on Fishery Industries Development, November 1991.
5 Bank of Sierra Leone Bulletin 1995
10
mined in the Eastern and Southern regions of the country. Sorne 314,000 carats were produced in 1987 but dropped to 28,000 carats in 1988. Smuggling has greatly reduced revenue coming to the government from diamonds, however, there are plans to raise production with the development of an underground kimberlite mine with an estimated annual yield of 750,000 carats. Iron Ore found in the north was exported until 1985 when the company exploiting pulled out due to problems. Rutile and bauxite are available and are mined in the Southern region of the country. In 1988, 100,000 tons of rutile was exported. Gold is found in severa! areas in the country and output in 1989 was recorded as 2,400 oz, like diamonds, smuggling is also affecting the exploitation of this mineral. lt is believed that most of the gold rnined in Sierra Leone is sold in Guinea. To encourage exporters to ship more diamonds and gold through the official channels, the tax rate on gold and diamonds have been reduced to 2.5 per cent of their assessed value. Requirements for establishing mining operations were made more apparent and for alluvial rniners licensing requirements were specified and the fee structure revised.
1.2 Economie Decline
The Sierra Leone economy has seen a marked deceleration in growth, severe recessiOn and stagnation since the early 1980s. While adverse external developments were a factor underlying this trend, inappropriate government macroeconomie and fiscal management policies combined with deteriorating performance in the mining sector cannot be ignored as important factors leading to the dramatic deterioration in the economie situation of the country in the 1980s.
The strain on the balance of payments worsened by the deteriorating terms of trade of the country' s major export. For example, in 1977, the priee of a ton of cocoa on the international market was $3,000, by 1986 it had slumped to $600. To add salt to this injury, the state regulated monopoly (the now abolished Sierra Leone Produce Marketing Board) was in the habit of under-valuing the priees peasant farmers received for export crops sold to the agency. This policy literally means that farmers who can smuggle their produce across the Liberia or Guinea borders would not only receive better remuneration, but will be paid in hard currency -the US dollar which was the legal tender in Liberia. This incentive to smuggle cash crops was the same for diamonds, which were even easier to smuggle because of their size. Recorded diamond exports dropped from 2,000,000 carats in 1970 to 595,000 carats in 1986, and to a derisory 48,000 carats in 1988. Consequently, budgetary revenues fell sharply from over 16 percent of GDP in 1980/81 to only 4.5 percent in 1985/86 due to reduction of the tax base.
Consequently, investments in new social and physical infrastructural facilities to meet demand of the growing population feil to a trickle. Rural feeder roads are in state of collapse and trunk
roads remains in poor condition. The main Freetown-Ba highway linking the capital to the Eastern region of the country where the majority of the agricultural and mining activities are undertaken is in an appalling state. The international airport at Lungi is functioning but in a poor state of repair and so is the port, although the harbor is one of the finest in Africa.
The oil-powered generation station that supplies the capital Freetown electricity has also deteriorated leading to frequent power cuts. Households and firms are forced to operate private powered generators. Although in 1996 the National Power Authority (NPA) made marked improvements in electricity supply via a $60 million rehabilitation project, the dearth of foreign exchange and huge debts to oil companies have unfortunately led to endemie fuel shortages making power cuts in the city a normal occurrence. Recently, the NPA alerted the public that it can only provide power to parts of the city at specifie times for the next eight months, the timeframe within which the repairs and or replacement of the generators is expected to be completed6.
Education like all other sectors has been on the decline although; Freetown once celebrated as the 'Athens of West Africa' because of its prestigious university, Fourah Bay College that in 1827 became the first institute of higher learning in Sub-Saharan Africa. In the 1980s due to frequent late payments of salaries to the grossly underpaid teachers, most teachers resort to offering private lessons to students that can pay extra after regular school hours and on weekends. It became obvious that to pass the external General Certificate Examination (GCE) parents have to come up with lesson fees for their kids.
6 News report from Sierra Leone website: sierra-leone.org/slnews.html
Instead of taking corrective measures in order to bring claims in Iine with available resources, restrictive regulations through administrative interventions were resorted to. This engendered the emergence of lucrative and pervasive parallel foreign exchange rate market resulting in higher fiscal deficits and inflation. Due to lack of accountability and the inability to deliver essential services, public confidence in the economy and government was seriously eroded. In addition, the continuance of the accumulation of externàl arrears led to the undermining of the confidence of the international community, making access to foreign capital even more difficult. Like most developing countries, Sierra Leone economie reform attempts since the 1980's depended on SAP.
1.3 Structural Adjustment Policies
In order to support the Sierra Leone government's reform efforts, the donor community, including the IMF and the World Bank, agreed to finance an Economie Recovery Program (ERP) and a Public Investment Program (PIP). The major elements of the policy reform package agreed with the IMF/W orld Bank consisted of:
+ Floating or managed exchange rate system
+ Provision of incentive priees to farmers to increase production of rice and export crops + Redeployment of workers in the civil service, including the removal of 'ghost workers'
+
Interest rate liberalization.+ Limitation on public expenditure and a reduction in budget deficit
+
Removal of subsidies on food and petroleum productsThe main objective of the exchange rate policy was to eliminate the parallel market. The Leone (national currency in Sierra Leone), was floated in June 1986, but when the rate feil to Le55 = US$1, the Leone was revalued and the rate fixed at Le23 = US$1. Although the flow of foreign exchange eamings through the normal banking channel is reported to have improved after the float, the gap between the parallel market exchange rates and the official rate persisted. The producer priees of rice and export crops like èoffee, cocoa and palm kemels were increased by 88-300%, keeping in the view of the then prevailing parallel market exchange rate. Further increases in producer priees were effected when the exchange rate depreciated.
In order to keep the budget deficit down, the Govemment apply severe cuts on its recurrent and developmental expenditures. The recurrent expenditure in education, health and agriculture sectors was greatly reduced. Provision for maintenance of plant, equipment, roads and govemment buildings were eut down. The creation of new posts or filling of vacant posts in both the professional and the administrative categories were banned. Sorne 'ghost workers' were removed from the pay roll and sorne 3000-4000 workers were declared redundant. Despite ali these steps, govemment budget deficit remained high at about 10 percent of GDP. This was attributed to the fall in revenues, which in tum was due to a fall in domestic production, compression of imports, losses of sorne businesses and leakage of revenue in the process of tax collection.
To achieve a positive interest rate in v1ew of the high rate of inflation, deposit rates were increased by 8-10% on the average in August 1986. Banks were free to make appropriate adjustments to their lending rates. Due to the general depression in business and the lack of
viable borrowers, banks refused to accept deposits at the announced interest rates. In the face of the continuous slide in the exchange rate and domestic inflation, holding idle cash balances in banks became unattractive. The currency held outside the banking system therefore increased enorrnously, thus contributing to the continued pressure on the Leone in the parallel market.
Simultaneously with the increase in producer priees, the selling pnce of imported rice and petroleum products and the tariff for electricity supply were raised. The selling priee of rice was raised from Le85 to Le170 per bag of 50kg. The priee of motor spirit was raised from Le8 per gallon to Le15, then to Le30 and again to Le55 per gallon. However, the government could not eliminate subsidies on rice and petroleum products altogether due to the fact that further increases in these priees will adversely affect the most vulnerable section of the population.
Consequently, in March 1987, the IMF suspended disbursement from its Structural Adjustment Facility (SAF). The World Bank also suspended disbursements of its structural adjustment loan of US $30 million that was linked to the IMF's SAF. The World Bank also suspended disbursements of its loans and IDA credits tied to various ongoing projects and programs from May 1987 when the Sierra Leone government could not remain current with debt service payments to the bank. In 1988, the IMF declared Sierra Leone ineligible for its normal credit facilities. Following this move, other multilateral and bilateral aid flows to Sierra Leone slowed down.
As a consequence of the failure to implement the PIP, the economie recovery envisaged in it did not materialize. In agriculture, the goal of food self sufficiency receded further as the gap between domestic production and consumption of rice continued to grow. The existing capital
stock and the economie and social infrastructure deteriorated as the rehabilitation program included in the PIP could not be implemented. The serious shortage of spare parts, raw materials and essential production inputs greatly reduced the capacity utilization in the manufacturing sec tor.
In 1989, reforms were re-introduced in Sierra Leone under an Enhanced Structural Adjustment Facility (ESAF). The Govemment initiated its first comprehensive market-oriented economie reforms. As a prelude to this comprehensive program, ail import and export licenses except for gold and diamond were abolished. To alleviate the effects of the anticipated loss of revenue, higher excise duties were levied on tobacco, beer and petroleum products. Extra budgetary expenditures were eliminated, subsidies reduced and a freeze was put on recruitment.
On March 31, 1989 the ex change rate was devalued from Le44 to Le 66 per US dollar. This was hoped to narrow the gap between the official and parallel exchange rates and recapture part of the diamond trade which had gone underground. The economy was further liberalized by privatizing the importation of rice trade, eliminating the govemment marketing board's monopoly on cocoa and coffee trade. Private enterprises were encouraged to enter the cash crops trade with the proviso that they would retain 40% of there export proceeds in foreign exchange while 60% was surrendered to the central bank in exchange for the Leone equivalent.
Credit and monetary controls were tightened as the BSL refocused monetary policy on more stringent reserve and liquidity requirements. On January 15, 1990 the Leone was again devalued by 54% in term of the US dollar and effective April 25, 1990 the government finally introduced a
market determined exchange rate. The ensuing months witnessed the undertaking of comprehensive series of structural reforms to further stabilize the economy, rebuild public trust and the resumption of normal relations with the rest of the donor community.
The government's efforts to stabilized the economy were disrupted by the civil war in Liberia and the Persian Gulf war. The war in Liberia led to the influx of more than 200,000 Liberian refugees and Sierra Leone's participation in Economie Community of West African States peace keeping initiative (ECOMOG) exerted significant pressure on the government finances and its administrative capacity to effectively carry on the structural adjustment program. The Persian Gulf crisis created severe shortages of petroleum products and cursed the resurgence of inflation to about 100% between December 1990 and December 1991. These added to the social tensions in the country and by mid 1992, the war in Liberia has spilled over to Sierra Leone and a rebellion by the RUF effectively started.
1.4 The Effects of the Civil W ar
The war has had a devastating effect on the economy of the country. Total production, export, investment (private and public), and external development assistance have declined.
Concomitantly, the revenue base has narrowed considerably and government expenditure on defense to counter the insurgence increased to the detriment of other sectors. Additionally, physical and social infrastructures had been destroyed and thousands of people had been killed maimed, traumatized and displaced.
From table 2, we see that production in ali sectors decline during the war period. Production in coffee and cocoa in 1992/93 were about one-fourth of their 1989/90 figures. This sharp drop and consequent cessation of production is obviously due to the rebel attacks in the southeastern region of the country. The same is true for the production of rice, which dropped from 517.8 to 411.1 thousand tons between 1989/90 and 1991/92.
Table 2 Production Volumes of Key Products
1989/90 1991/92 1993/94 1995/96
Cocoa ('000 tons) 24.4 5.3
NA NA
Coffee ('000 tons) 29.6 7.9
NA NA
Rice ('000 tons) 517.8 411.1
NA NA
Diamond (000 cTs) 116 328 174 216
Rutile ('000 tons) 137 150 154 6
Bauxite ('000 tons) 1567 1153 789 0
Cigarettes (M sticks) 1195 595 501 49
Fish ( Me tric tons) 232.7 123.3 68.8 57.6 Source: Bank of Sierra Leone Bulletin, 1997
The prevailing insecurity caused by the war forced sorne gold and diamond mining companies to rely on private security firms - notably the Executive Outcomes of South Africa to protect their mines. This explains why official diamond production did not drop drastically. However, a
provision m the Abidjan Peace Accord signed by the government and the rebels in 1996 stipulates that the executive outcome should leave the country and they have since left. Until 1995, the US/Australian firm Sierra Rutile (which produces titanium dioxide) and SIEROMCO that produces bauxite were unaffected by the war as shown in the trends in table 2. The drop in bauxite production between 1989/90 and 1993/94 was due to external and management related problems. The attacks on mining installations in 1995 forced both companies to close their mines. Sierra Rutile has indicated its willingness to resume mining but SIEROMCO has confirmed its decision to abandon its mines.
Before the military coup in 1997, the official exchange rate was Le780: US $1. This value feil as far as Le2500: US$1 within severa] weeks of the coup. In February 1998, after the military junta was pushed out of Freetown by ECOMOG, the exchange rate stabilized at around Le1405: US$1. However, this rate shot back up after Freetown was invaded by a second rebel attack on the 61h of January 1999. This invasion led to the collapse of the formai financial system. The central bank was heavily destroyed and the Ministry of Finance razed to the ground. Barclays Bank and Standard chartered Bank, the two commercial banks that accounted for about 80 percent of the domestic market savings and current accounts closed their doors following the coup. The recurrence of rebel activities that culminated in the month long invasion of Freetown has compelled Barclays Bank to permanently cease operations in Sierra Leone.
In general, the sense of insecurity has worsened the foreign exchange position not only through reduction in export earnings but also through its effect on the tourist sector. The rebels have not directly hit most of the tourist infrastructure, but the non-arrivai of tourists has subsequently
forced many hotels to fold up as the infrastructure deteriorates due to law occupancy rates. The Tourist arrivais dropped from 28468 to 13701 resulting in drop of the total revenue generated from tourism from US$14.4 to US$6.4million between 1990-95. Consequently, severa] major operators have closed their facilities.
Nonetheless, policies that were undertaken at the start of the adjustment program to enhance market incentives leave Sierra Leone weil poised to experience growth, if peace is sustained.
Prospects for reviving the economy depends on the implementation of the Lame Peace Accord signed between the govemment and the RUF in July 1999. This should be supplemented by the intensive execution of rehabilitation and integration programs so that the productive sector could be revamped. The disarmament though behind schedule is progressing and there are hopes that once the deployment of ali the UN Peace Keeping Force is completed, the process will be accelerated.
CHAPTER TWO: A Brief Litera ture Survey
Countries trade because their demand for goods and their ability to provide them differ. In attempting to explain the trade between nations, Ricardo developed the theory of comparative advantage. Based on this theory, a country has a comparative advantage in the production of a good if its relative priee in autarky is lower in relation to that of its trading partners. Given this scenario, the mutual benefit of trading partners will be maxirnized if each country specializes in the production of goods for which they have a comparative advantage. This implies that countries will be better off when they import goods which the rest of the world is more efficient in producing and export goods which they produce more efficiently vis-a- vis the rest of the world. The abundance of cash crops and mineral resources coupled with limited manufacturing technology in developing countries gave birth to the notion that the comparative advantage of these countries lies in exporting basic raw materials to developed countries and import almost everything else.
Unfortunately the experience of the majority of Sub-Saharan African countries has been contrary to this perception. These countries thus started undertaking trading strategies that are not in line with the comparative advantage theory and the results have been mixed. A better understanding of what determines trade flow in developing countries is therefore imperative. A first step to achieving this goal is to thoroughly review studies that have dealt with trade flows in developing countries. This chapter therefore aims at reviewing the empirical studies carried out on the determinants of imports in developing countries. However, we will first discuss the theoretical background to the specification and estimation of import functions. The rest of the chapter is laid
out as follows. Section I discusses the theoretical background to import determinants. Section II will give detailed review of the determinants of imports in developing countries followed by a synopsis of the review.
2.1 Theoretical Background
The theoretical framework for the determination of trade volumes and priees is a familiar one since it stems from the general demand and production theory. In modeling import behavior, two general models of trade have dominated the literature- 'the perfect' and 'the imperfect substitute' models.
2.1.1 The Perfect Substitute Model
The perfect substitute mode] does not have a separate import demand function, instead the demand for imports are represented by the excess demand for domestic goods. This means that estimating or forecasting import demand for a perfectly substitutable good is really a matter of forecasting domestic demand with imports appearing as residuals. This is very difficult to do.
Also, there is only one priee in the perfect substitute model. The rationale is once we abstract from transportation costs and other trade barriers and express all priees in a common currency, then there is only one-traded goods priee. This world priee is determined by the interaction of world supply and demand for the traded good. In other words, a country can only affect the priee of a traded good to the extent that it can affect world supply or demand. Estimating these models have proved to be very difficult in practice as estimates of domestic demand are usually harder to
obtain than those of imports, the imperfect substitute model has been the most prevalent in the empirical trade literature.
2.1.2 The Imperfect Substitute Model
The imperfect substitute model is based on the simple observation that imported goods are imperfect substitute for domestically produced goods and that exported goods are imperfect substitutes for other countries' domestically produced goods, or for a third countries export.
Basically, proponents of this model assert that a country can be an importer or an exporter of a traded good but not both. Credence was given to this claim when Magee (1975) showed that if domestic and foreign goods are perfect substitute then either the domestic or the foreign good will be expected to swallow up the whole market when each is produced under constant or decreasing cost. Also, given that there are significant and non-transitory priee differences for the same product in different co un tries and th at do mes tic and export priees differ within a country, the law of one priee is not expected to hold either across or within countries.
Imperfect substitute models also assume that priees move to equate demand and supply in each time period. However, economie theory [see for example Hay (1950)] argues that firms will attempt to balance the cost of changing priees to the cost of other adjustment measures such as changing inventories. Therefore if the market clearing property of the imperfect substitute model is to be retained, then non-priee rationing variables should be included in both the import and export equation so that priee changes alone are not presented as the sole catalyst for market clearing conditions. Alternatively, observed trade quantities and priees have been postulated to reflect markets in disequilibrium with partial adjustment mechanism being specified accordingly.
This confirms that the equilibrium characterization of the imperfect substitute models is only one of several possibilities. The main characteristics of this model is based on conventional demand theory which postulate the consumer's attempt to maximize his utility subject to a budget constraint. In cases where the importer is a producer, the demand for imports are then derived by maximizing production subject to a cost constraint. The import function thus presents the quantity demanded as a function of level of incarne in the importing country, the priee of the imported good and the priee of domestic goods. The equations in these models are usually expressed in logarithms so that the coefficients can be easily interpreted as elasticities. Typically the import function is expressed as follows:
Where, M1
=
lmport quantity P*=
Relative PrieesYt
=
Incarne in the Importing Country2.1.3 Choice of Variables
(1)
In choosing a scale variable for the specification of import demand a choice has to be made between 'real incarne' and 'real expenditure'. The issue is whether domestic demand for foreign goods i.e. imports should be properly related to the domestic demand for all goods. The Keynesian preference for 'real incarne' follows naturally from the foreign-trade multiplier, incarne driven view of balance-of-payments adjustment. In a monetary oriented framework, (see for example, Aghevli and Khan (1980)) the tendency has been to favor real expenditure over real mcome. This is mainly because it can be related to the difference between actual and real money
balances and therefore assures the role for money in the trade and balance of payments adjustments.
Equation (1) typically assumed that the demand for imports is independent of the priee of non tradable goods, therefore, only the relative priee of import to domestic tradable goods need to appear in the import demand equation. The rationale is that a consumer engages in a two-step consumption process. He first allocates his expenditure between ali tradable and non-tradable goods and then allocates his expenditure on tradable goods between imports and domestic tradable goods.
The problem then encountered by researchers is the lack of priee indices for domestic tradable goods. Inevitably, proxies like wholesale priee index and GDP deflators are used. These, indices contain nontrivial shares of products that might be reasonably considered non-tradable goods(Goldstein and Officer (1979)). This being the case, the estimation of import demand equations using wholesale priee indices or GDP deflator will usually yield an identical cross priee elasticity for tradable goods and non-tradable goods.
Fortunately, Goldstein et al. (1980) showed that for the majority of the countries they studied, the priee of non-tradable goods are insignificant in determining the demand for imports. This validates the inclusion of only relative priee of imports to domestic tradable goods in the import demand equation and therefore lends support to the assumption that a consumer engages in a two step consumption process that eventually separates their consumption of tradable goods between imports and domestic tradable goods.
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Equation (1) thus represents a traditional import demand model and these models have performed weil when estimated. However, the rehabilitation of the quantity theory of money by the Chicago School introduces the significance of the monetary approach to balance of payments especially when dealing with developing countries. This is mainly because it was observed that less developed countries typically have simpler financial structures than the more developed countries. In the absence of well-developed assets markets and financial instruments, there are relatively very few alternatives to holding funds in monetary form or spending them on domestic or foreign goods. This implies that residents tend to hold more money than in a more complex financial structure. Thus the amount of money in circulation or broadly speaking the money supply will influence import demand.
Traditional import demand models also assumes that the currency that is needed to buy imports is available and thus there are no foreign exchange constraints. As observed by Polak and Rhomberg (1962; ppll3), as a group, developing countries have had to adjust their foreign exchange, mostly for imports, to the foreign exchange receipts on account of experts. Piekarz and Skekler' s (1967) study on "Induced Changes in Trade and Payments" supported the notion that export eamings influence imports when their findings show that for a sample of developed and developing countries, experts eamings significantly influence imports. Thus foreign exchange constraint has been considered as a determinant of imports especially for developing countries.
It is also important to note that equation (1) is presented as an equilibrium relationship without any reference to time. In the real world, the presence of adjustment costs and of incomplete information implies that the adjustment of dependent variables to explanatory ones will not be instantaneous. This means that importers will not always be on their long-run demand schedules.
To capture the effect of lags in the adjustment process, lagged variables have been incorporated into import demand equations. The approach frequently employed by researchers in modeling dynamic trade behavior is to specify the equation within a framework of a general distributed-lag mode! with geometrically declining weights.
A popular lag mode! is the Koyck's model, which for a specifie case of import demand is written as:
Where
p
measures the response of actual imports to the demand for imports and is bounded (0, 1 ). IfP
equals unit y th en actual imports equals desired imports and ifp
is zero it implies th at equilibrium is never reached. A variant of the Koyck's model is the partial adjustment model that states that imports adjust to the difference between the demand for imports and actual imports in the previous period. This model is represented as follows:By substituting for Mct in equation (1), a redueed form equation that adds the lagged import term is obtained. A second variant of the Kyock's model is formed according to the adaptive- expectations model of Cagan (1965). In this case the demand depends not only on actual priees but also rather on sorne notion of expected priees. The equation obtained with this variant is fairly similar to that yielded by the partial adjustment mechanism.
Partial adjustment mechanism is very popular with researchers because the results obtained have been generally satisfactory and easily interpreted. Despite its popularity this mechanism imposes a restrictive dynamic structure in the data, which will be more desirable to test rather than impose a pnon. The realization that variables such as real income and imports can be decomposed into a stationary and a non-stationary component has called for the adoption of a more flexible dynamic specification of trade data. Consequently, co-integration technique has been used to address the inherent specification problem in partial adjustment mechanism.
A frequently asked question is whether it is neeessary to estimate disaggregated or aggregated relationship. Theil (1954) discovered that for an aggregate import demand equation, the real income and priees depend not only on the corresponding parameters of the disaggregated relationship but also on the parameters of the other included variables. This means that the aggregate real income coefficient will be a weighted average of the disaggregated real income and priee coefficients. He thus concluded that unless ali the disaggregated coefficients are equal, estimation of aggregate relationship would result in a specification bias. It should be noted that while disaggregation may be preferable in principle, there has been sorne controversy on its merits in practiee. If the disaggregated data are accurate and the component equations well
specified, then disaggregation always results in more information. But Grunfeld and Griliches (1960) and Aigner and Goldfeld (1974) make the point that disaggregated data are generally subject to larger measurement errors than aggregate data, and further that disaggregated functions are more likely to be mis-specified than aggregate relationship. In such a case, it may be advisable to estimate aggregate relationship.
2.2 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
