Estimation of Import and Export Demand Functions Using Bilateral Trade Data

Date01 July 2011
Published date01 July 2011
Subject MatterArticle
Estimation of Import and Export Demand
Functions Using Bilateral Trade Data
The Case of Pakistan
Muhammad Afzal and Jahanzaib Haider
We estimated the import and export elasticities of Pakistan trade
with traditional trade partners and some Asian countries to see
the dynamics of Pakistan’s trade from 1973 to 2008. OLS results
suggest that income is the principal determinant of exports and
imports. Its exports are cointegrated with Japan and the US while
the imports are cointegrated with UAE and the US. Pakistan
imports and exports are cointegrated with Bangladesh and Sri
Lanka but not with India and China. Income and exchange rate
are both important determinants of foreign trade. Continuing its
trade with traditional partners and making efforts for greater
market access to the US and EU, it should make efforts to increase
its trade with Asian countries notably China and India because
both are fast growing economies and have huge market.
JEL Classification: F01, C51.
Keywords: Imports and exports elasticities, Pakistan, Asian
countries, cointegration.
I. Introduction
INTERNATIONAL trade has played an important role in the
development of both developed and underdeveloped countries
because countries are dependent on one another due to uneven
distribution of resources. Export of agricultural and other primary
commodities accounts for a major share of developing countries
income. Besides export dependence, developing countries are also
heavily dependent on the import of diverse capital and consumer
goods to feed their industries and satisfy their peoples’ consumption
needs. Developing countries have been facing balance of payments
(BoPs) problems because of divergence in imports and exports and
hence the importance of foreign trade is obvious.
Pakistan is keen to become a key player in global economy.
However, in terms of trade it does not enjoy a significant share.
Recognizing the importance of trade, different governments have
adopted different policies about trade according to international
economy demands.
Precarious nature of the Pakistan’s economy was acknowledged
by the government soon after independence in 1947 and a strategy of
import substitution (IS) industrialization was adopted through an
over-valued exchange rate, use of quantitative controls on imports
and the export taxes on principal agricultural exports: cotton and
jute. Though some policies of 1950s were continued in 1960s, a number
of new policies in the realm of economic management were adopted.
Pakistan’s economy suffered as well as benefited from international
events in 1970s. Pakistan started liberalizing the economy with the
help of IMF and World Bank in 1982-83 with a view to improving the
efficiency of the economy by increasing the role of the private sector.
Most of these reforms were implemented by mid-1980s. The process
of liberalization started during 6th Five-Year-Plan (1983-88) and was
implemented with great force after 1988. The government pursued
vigorous trade liberalization in the beginning of 1990s. Like many
other developing countries, Pakistan has made noteworthy efforts to
integrate its economy with rest of the world through foreign trade,
investment and other macroeconomic policies (Afzal 2006a). Pakistan’s
trade suffers from a number of problems that includes concentration
in composition and markets, lack of market access to major trading
partners – EU (European Union) and the US, uninspiring performance
of the economy, unfavourable international conditions, adverse terms
of trade, high population growth, lack of technological development,
etc. Although Pakistan trades with a large number of countries, its
exports are highly concentrated in few countries. More than 50 per
cent of Pakistan’s exports during 1990-99 went to seven countries,
namely, the US, Japan, Germany, UK, Hong Kong, Dubai, and Saudi
Arabia. Pakistan’s exports are highly concentrated in few items,
namely cotton group, leather group, rice, synthetic textiles, wool,
carpets and sports goods. These seven categories of exports accounted
for 84 per cent in 1990-91 but declined to 76.6 per cent in 2005-06.
Such a high degree of concentration of exports in few items leads to
instability in export earnings that also hinders smooth growth of
Pakistan’s exports (Afzal and Ali 2008).
A large number of studies have been done on the import and
export behaviour and trade policy of Pakistan (Afzal and Hussain
2010, Afzal and Ali 2008, Afzal 2008a, Afzal 2008b, Afzal 2006a,
Afzal 2006b, Afzal and Shah 2006, Bader 2006, Afzal 2005, Afzal
2004, Atique and Ahmad 2003, Afzal 2002, Afzal 2001a, Afzal
2001b, Akbar and Naqvi 2001, Akhtar and Malik 2000, Khan and
Saqib 1993, Sarmad and Mahmood 1985, Sarmad 1989, Anwar
1985, Naqvi et. al., 1983). These studies have used different
methodologies, different objectives, and diverse time periods and
have reported divergent results.
However, these studies are Pakistan trade-specific that have not
addressed Pakistan’s imports and exports scenario with its traditional
trading partners (the US, EU, UK, Japan Saudia Arabia, UAE ) and
also trading with the neighbouring Asian countries (India, Bangla-
desh, China, Sri Lanka) whose importance has been acknowledged
by the government of Pakistan (2009-12, 37). This document noted
that China, Afghanistan, Iran and India are “our natural trading
Pakistan is a member of two regional groups, the South Asian
Association for Regional Cooperation (SAARC) and the Economic
Cooperation Organization (ECO), but none of the two has been
successful in promoting intra-regional trade in a significant way.
Despite the preferential treatment, intra-regional trade has been
around 4 per cent of the total trade in the ECO and the SAARC. The
share of intra-regional imports was 11.7, 0.7, 33.2, 2.3 and 10.1 per
cent of the total imports of Nepal, Bangladesh, Sri Lanka, Pakistan
and India respectively in 2000. Trends in intra-regional exports reveal
a different picture (Kemal 2004).
Keeping in view the growing importance of trade notably trade
with close neighbours, the purpose of the paper is to empirically
address and investigate the imports and exports of Pakistan with its
traditional trading partners and the neighbouring Asian countries
using traditional and time series techniques of estimation. Rest of the
paper is structured as follows: Section 2 provides Pakistan’s imports
and exports situation. Review of studies is briefly discussed in Section
3. Methodology and data are given in Section 4. Section 5 carries
empirical results and analysis, and the conclusions have been given
in the final section.

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