Export instability, imports and investment in developing countries

Abstract

Prominent among the arguments comprising the pessimistic orthodoxy on the impact of export instability on the domestic economies of developing countries is the view that such instability adversely affects the capacity to import and, in turn, investment. Beginning from a conventional Harrod‐Domar framework, this article develops a time‐series model which is then applied to data for a sample of developing countries. The results suggest that export instability does affect both capital goods imports and, to a lesser extent, domestic investment. There is little evidence of offsetting movements in international reserves.