Estimating export demand equations in selected Asian countries

Abstract

PurposeThe purpose of this paper is to utilize the new specification proposed by Rao and Singh to estimate export demand equations for Asian developing countries, viz. India, China, The Philippines, Indonesia, Singapore and Malaysia. In this specification of export demand, exchange rate is included in the relative price variable.Design/methodology/approachThe augmented Dicky‐Fuller method is applied to test the time‐series properties of the variables. The time‐series techniques of Phillip‐Hansen's fully modified ordinary least squares and Johansen's maximum likelihood are used with annual data from 1970 to 2007. The Granger causality test determines the causality direction between income, relative prices and exports.FindingsThe paper confirms that there exists a long‐run cointegrating relationship between real exports, real income of trading partners and relative prices. The long‐run income elasticities range between 1 and 1.3 and the relative price elasticities range between −1 and −1.4. Our Granger causality results imply that in the long‐run income and relative prices Granger cause exports in these countries.Research limitations/implicationsStructural breaks and trade shock analysis were ignored.Practical implicationsThe results imply that exports should be treated as an engine of growth in the Asian developing countries and the export promotion policies such as subsidies, special credits and tax concessions should be encouraged. The relative price elasticities imply that exports are competitive in the international market and these countries have the option to devalue their currency to enhance export earnings. Although the real devaluation of the currencies will push import costs high, eventually this motivates the local firms to undertake alternative options, for instance, import substitution. Further, the gains resulting from the export growth policies will be attractive.Originality/valueThe paper assesses the magnitudes of export elasticities with a specification that includes exchange rate in relative price variable.