The Supply and Demand for Exports of Pakistan: The Polynomial Distributed Lag Model (PDL) Approach

Transcription

1 The Pakistan Develoment Review 42 : 4 Part II (Winter 23) The Suly and Demand for Exorts of Pakistan: The Polynomial Distributed Lag Model (PDL) Aroach ZESHAN ATIQUE and MOHSIN HASNAIN AHMAD. INTRODUCTION In the global economy, the erformance of any country will greatly deend on the erformance of its exorts. The trade erformance determines the rosects of change. It hels countries win friends, and break the traditional mould of isolation and indifference. The erformance of exorts of countries deends on various rice and non-rice factors. In international trade transactions it is imortant to recognise that these transactions require some amount of time that occurs between the decision to buy and actual delivery of the roduct from foreign country. In the Econometric modelling lag occuies a central role. It is recognised that due to sychological, technical and institutional reasons, a deendent variable may resond to exlanatory variables with lase of time, in articular when dealing with time-series trade models. A number of studies have been conducted to examine the exort erformance of Pakistan. In the best of our knowledge, no study has been undertaken incororating lags to examine the individual and cumulative imact of determinants of exort erformance of Pakistan. Thus, the ultimate urose of this aer is to estimate consistent individual (short run) and cumulative (long run) elasticities of both exort demand and suly determinants using annual data over the eriod by alying Almon aroach. Zeshan Atique is Faculty Member, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Karachi, and Lecturer in Economics at the University of Karachi, Karachi. Mohsin Hasnain Ahmad is Project Economist, Alied Economics Research Centre, University of Karachi, Karachi. Almon technique has a distinct advantage over the Koyck method because the latter has some serious estimation roblems. Moreover, Koyck will not work when assumtion of β coefficient decline, geometrically, is violated.

2 962 Atique and Ahmad The lan of the aer is as follows: Section 2 resents literature review; while the data set and model are discussed in Section 3; the result and interretations of these analyses are in Section 4 and conclusion and olicy imlications are summarised in the last. 2. LITERATURE REVIEW Various studies have been conducted incororating different determinants of exort growth to evaluate the erformance of the variables affecting exorts and imorts in different countries. Houthakker and Magee (969) conducted ioneering study to determine exort erformance using time series data. Khan and Goldstein (978) later examined elasticity of determinants of exort demand and suly for the samle of eight countries by using simultaneous aroach (2SLS). They found large exort rice elasticities of demand with medium term effect of indeendent variables on the adjustment of exorts and also exlained world income as a significant comonent of exort demand. Goldar (989) estimated the effect of roductivity increase on India s exort erformance in engineering roducts and found out ositive relationshi between world demand and exort erformance of India s engineering sector. Roy (99) also suorted the finding of Goldar and found out world demand along with exchange rate as imortant factors in determination of exort erformance of Bangladesh. He found out that the devaluation has some ositive imacts on exort erformance of Bangladesh. Ahmad (2) by alying Cointegration Technique and Error Correction Model for the exort suly of Bangladesh found the significant relationshi between the exort rice, exchange rate, domestic caacity, and exort suly of Bangladesh. In the case of Pakistan the studies conducted during the last two decades used different techniques and incororated different determinants for exort erformance. Initially studies were conducted assuming exort demand as exogenous [Naqvi (982) and (983)]. Anwer (985) used the simultaneous aroach (2SLS) to examine exort erformance of Pakistan. He found the rice elasticities are not significant while world income and domestic roduction significantly exlain the demand and suly side of exort resectively. For Pakistan Hasan and Khan (994) carried out study and secified demand-side factors and suly-side factors for exort erformance of Pakistan. They also examined imact of exchange rate olicy on Pakistan s trade balance by alying 3SLS technique. Their results showed that exort demand is ositively related with world demand and negatively related with relative exort rice in case of both rimary and manufactured exorts. The nominal exchange rate, on other hand, osited a ositive and significant relationshi between exort demand in both cases. Another study for the determination of exort demand and exort suly factors conducted by Sajjad and Fauzia (2) for Pakistan s economy, they examined the imact of exchange rate olicy of Pakistan. They also determined the

3 Suly and Demand for Exorts of Pakistan 963 rice and income imact on trade balance with resect to four major trade artners. They estimated Cobb-Douglas form equation using 3SLS technique. In summary the world income is one of the most imortant determinants of exort demand, whereas, the exchange rate 2 shows statistically mixed results on exort erformance. Emirical studies showed domestic caacity utilisation as a significant determinant on suly side, while; relative rices do not reach the traditional level of significance in all studies. 3. THE MODEL AND DATA SOURCE In order to realise aim of the study, world demand for Pakistan goods is secified in log-linear form. The demand function can be exressed in the following form: Ln Xd =α + α LnREER + α 2 LnEA+u () It is exected that α will be negative and α 2 ositive Xd = Quantity of Exort Demanded EA = World Economic Activities REER = Real Effected Exchange Rate In this study world economic activity is reresented by industrial roduction index of industrial countries (IPI). 3 Since the above equation is secified in log-linear α and α 2 are the elasicities of demand of exort with resect exlanatory variables. The Suly of exort is secified as follows Ln Xs=β +β Ln (RP) +β 2 LnY+β 3 LnWr + u 2 (2) Where it is exected β, β 2 > and β 3 <, similarly as mention above β, β 2 and β 3 are the elasicities of suly of exort with resect exlanatory variables Xs = quantity of suly of exort RP = (UVE ak /CPI ak ) relative rices, the unit value of exort (UVE ak ) of Pakistan to domestic rices of Pakistan (CPI ak ) Y = Domestic Production Caacity Wr = Wage Rate er Worker 4 Predicted values of real GDP (98=) used as a roxy variable for domestic roduction caacity of economy. 2 Different studies used different tyes of exchange rates ( nominal, real, and effective). 3 Industrial roduction index of industrial countries is taken as a roxy of world economic activity because more than 6 ercent of exort of Pakistan goes to industrial countries. 4 Wage rate as roxy of cost of roduction is first time used in exort suly equation of Pakistan.

4 964 Atique and Ahmad In order to estimate the distributed lag model, Equations () and (2) remodeled as follows. 5 The exort equation becomes k k LnXd = γ + LnϕREERt i + LnIPI t i + Vt i The suly equation becomes k LnXs = β + βlnrp + β2lny + ζ LnWrt i + V2t i (3) (4) Equations (3) and (4) were estimated using the Almon lag rocedure with K=3 6 and the degree of olynomial were 2 with no end constraint. Before going on data few words are in order about the data. The estimation was erformed using annual data for years 972-2, all the data are annual and taken from the following sources:. International Financial Statistic (IFS). 2. Economic Survey (ES), various issues. 3. Statistical Year Book (SYB). Data for unit value of exort (UVX), volume of exort (VEX), consumer rice index (CPI) of Pakistan and world consumer rice index (WCPI), Industrial roduction index (IPI) exchange rate (ER) of selected exort artner countries of Pakistan 7 are taken from (IFS). Data for wage rate is taken from (SYB) and data for exort of selected countries, real GDP of Pakistan are taken from (ES). This data is further used for estimation of variables EMPIRICAL RESULTS The estimated exort demand equation is satisfactory with resect to sign, high adjusted R 2, no autocorrelation and articularly significance of long run coefficients of both exlanatory variables. The current and lagged one, two and three of REER is insignificant at 5 ercent level, but cumulative effect is significant at 5 ercent level. 5 We check the simultaneity roblem between exort demand and suly equation by emloying Huasman Secification Test. We found that there is no simultaneous roblem exists between exort demand and suly equations. 6 The number of lags included was determined using Akaike Information Criteria (AIC), indicating that otimal lag is 3. 7 Share of exort of trade artner more than ercent in total exort in Estimation rocedure of real effective exchange rate and roduction caacity of economy is given in Aendix.

5 Suly and Demand for Exorts of Pakistan 965 Thus, results indicate that a ercent decrease in REER would increase the quantity of exort demanded by.49 ercent in current year,.36 ercent in second year,.53 ercent and.3 ercent in third and fourth years resectively. Similarly, ercent devaluation or dereciation of Ruees will increase the exort demand by.39 ercent in long run. The result shows that the elasticity of demand for exort with resect to real effective exchange rate is inelastic short run (individually) as well as in long run (cumulatively). The Exort Demand Equation Lagged Exlanatory Variables Estimated Coefficient T-Ratio Constant * REER () REER ( ) REER ( 2).53.7 REER ( 3).3. IPI () ** IPI ( ) ** IPI ( 2) ** IPI ( 3) REER ( i) ** 3 IPI ( i) * Adjusted R².92 D.W 2.6 * and ** indicate significant at ercent and 5 ercent resectively. The elasticity of demand for exort with resect to IPI index is inelastic for individual years excet forth year. Their cumulative effect in long run is elastic, the sum of elasticity is greater than one that is, 2.9 and significant at ercent level. The current industrial roduction index is significant at 5 ercent u to 2 lags. This suggests that IPI would take 3 years to have full imact on quanity of exort demanded. In articular, ercent increase in industrial index would increase the exort of Pakistan by.33 ercent in current year,.69 ercent in second year,.68 ercent in third year and.5 ercent in forth year. The results of exort suly equation are significant with resect to sign and high-adjusted R 2 and no autocorrelation.

6 966 Atique and Ahmad The Exort Suly Equation Exlanatory Variables Estimated Coefficient T-Ratio Constant * LRP LY * Wr () Wr ( ).5.43 Wr ( 2).8.52 Wr ( 3) Wr ( i) * Adjusted R 2.92 D.W 2.3 *and ** indicate significant at ercent and 5 ercent resectively. The coefficient of relative rice has correct sign but insignificant, redicted values of real GDP and cumulative effect of wage rate have emerged as significant determinant of exort suly function. The erformance of (LY) is according with theory; with coefficient being significant the (LY) elasticity is elastic with resect to exort suly and also significant. The result suggests that ercent increase in domestic caacity of the economy will increase the exort suly by 3.7 ercent. The coefficient of wage rate is insignificant individually at 5 ercent but significant at 5 ercent at cumulative level, elasticity of exort suly with resect to wage rate is inelastic. Results suggest that ercent increase in wage rate the exort suly will decrease by.7 ercent. Our result is in the line of structuralist economists that reduction in real wage without increasing roductivity does not increase outut and emloyment [Taylor (99) and Tra (993)] 5. CONCLUSION AND POLICY IMPLICATIONS The emirical results suggest that the world economic activity and real effective exchange rate are the imortant determinants of exort demand of Pakistan. However significant and inelastic coefficient of REER on demand side in the long run oints out towards an interesting olicy imlication that devaluation or dereciation may not be an effective source of exort growth in Pakistan. The significant and elastic coefficient of world economic activity shows colossal deendence of Pakistan s exort on trading attern in the world economies. The results indicate that the government should monitor the business cycles of its trade artners in order to target exanding exorts during their eriods of cyclical

7 Suly and Demand for Exorts of Pakistan 967 booms. Government should make it a riority in its olicy agenda to exand exorts to major trade artners by diversification of exorts with better quality roducts and high value added comonents. On the suly side the wage rate is although insignificant in the short run but its cumulative effect is significant and less elastic. Our result is in the line of structuralist economists that institutions (economic and olitical) do matter. The coefficient of domestic roduction caacity is significant and elastic that shows greater role of domestic roduction in determination of exort of Pakistan. These results suggest need of olicies for greater utilisation of roductive caacity of the economy. While insignificant relative rice coefficient suggests that it is not statistically imortant determinant of exort suly in case of Pakistan. Desite the imortance of above mentioned factors non rice factors such as roduct differentiation, trade romotion, facilities at orts, infrastructural facilities, etc. may also roduce greater influence on exort erformance and government should also consider non rice factors in future olicy formulation to romote exort. APPENDIX Real Effective Exchange Rate In this section, we shall briefly exlain the calculation of Pakistan s ruees real effective exchange rate based on exort weighted exchange rate. For exort weighted exchange rate, the trade artners were chosen on the basis of exorts are more than ercent in total exorts in 99. Let X be the value of exorts to the th trading artner in the base eriod (), exressed in that artner s currency. Let e and e be the dollar values ($/currency) of one unit of the th artner s currency in eriod and in the base r r eriod (), resectively, and e and e be the dollar values ($/currency) of one unit of the reorting country s currency in eriod and in the base eriod (), resectively. Then, to comare the change in the values of the base eriod s exort earnings (from all artners) owing to exchange rate movements, the following ratio is formed ( e / e ) = * () r X ( e / e ) E X o o o r o Where, subscrits refer to the time eriod and suerscrits to the country. The rice and quantity comonents X of the value of exort receits are held constant only the relative exchange rates are changed. Through simle maniulation,

8 968 Atique and Ahmad Equation () can written in a form readily recognisable from the effective exchange rate literature Where, r W e e E = * (2) r W e e W = X e r e In formulation (2), the index is shown to be simly the bilateral exort weighted index of the nominal effective exchange rate described by the Rhomberg r e e [(976),. 95]. The result and are the indices changes from the base eriod r e e in s and r s numeraire exchange rates, resectively. Nominal Effective Exchange Rate Adjustment for Inflation Differentials Consider the nominal index rate derived in formulations () and (2). Deflating equation () by the ratio of rice changes from the base eriod in the artner countries to that in the reorting country gives, after a number of mathematical maniulations, where, r r e e e r r * e R = Z (3) r r e W is the bilateral exort share; Z = W r r r e e e = and = are bilateral exchange rates of the artner countries to those of the r r reorting country at time and time, resectively;and = and t r / / = are the ratios of exort rocess of the artner countries to those of reorting country at time and time. Equation (3) can, in turn, be easily exressed in a more reduced, mathematically equivalent form, that is, = Z ( r r ) R r r r e (4) Where = and r r r = e so that R is a weighted sum of real exchange rates.

9 Suly and Demand for Exorts of Pakistan 969 Production Caacity of Economy For roduction caacity of economy, the Predicted value of real GDP (99=) used as roxy of real GDP [See Khan and Goldstein (978) and Ahmad (2)]. REFERENCES Ahmed, Naseeruddin (2) Exort Resonse to Trade Liberalisation in Bangladesh: A Co-integration Analysis. Alied Economics 32, Anwer, Sajjad (985) Exort Function for Pakistan: A Simultaneous Equation Aroach. Pakistan Journal of Alied Economics 4:, Goldar, Bishwanath (989) Determinants of India s Exort Performance in Engineering Products, Develoing Economics 27:. Hasan, M. Aynul, and Ashfaque H. Khan (994) Imact of Devaluation on Pakistan s External Trade: An Econometric Aroach. The Pakistan Develoment Review 33:4, Houthakker, H. S., and S. P. Magee (969) Income and Price Elasticities in World Trade. Review of Economics and Statistics 5:2. Hausman, J. A. (976) Secification Tests in Econometrics. Econometrica 46, Khan, Mohsin S., and M. Goldstein (978) The Suly and Demand for Exorts: A Simultaneous Aroach. Review of Economics and Statistics May: Naqvi, S. N. H., et al. (983) The P. I. D. E Macro Econometric Model of Pakistan s Economy. Islamabad: Pakistan Institute of Develoment Economics. Rohmberg, Robert R. (976) Indices of Effective Exchange Rages. Staff Paers 23, Roy, Dili Kumar (99) Determination of Exort Performance of Bangladesh. The Bangladesh Develoment Studies 9:4. Sajjad, and Fauzia (2) Pakistan Trade Performance via-à-via its Major Trading Partner., Taylor, L. (99) Socially Relevant Policy Analysis: Structuralist Comatible General Equilibrium Models for Develoing Countries. Cambridge, MA: MIT Press. Tra, F. (993) Stabilisation and Structural Adjustment: Macroeconomic Frameworks for Analysing Sub-Saharan Africa. London: Routlege