CHAPTER .. 3

...._:~ ------=c I

CHAPTER 3

HEVIEW OF LITERATURE AND METHODOLOGY OF THE PRESENT

STUDY

3.1 Introduction :-

Trade has always been an important area

of discussion and have covered pages after pages. Trade,

to a large eHtent d<>terrrd.ne t~.e level of J. i.ving, the

rate of economic growth and distribution of income and •·1

weal tt•. Trade can be classified into :-111 Export

and Import of commodities and services.

121 Financial relations.

(3) Migration of people and 141 Interchange of knowledge

that is concerned *2

with economic development

activities. Exports and financial relations play an

important role to determine the income of a country.

Financial relations include exchange rates, capital

movements, foreign investment holdings, gift etc.

---------------------------------------------------------Coppock, Jose ph.D; "International Economic

Instability : The Experience After World War II; Mcgraw

Hill Book Co. 1962, Newyork, P.4.

*2 Coppock, J.D.; op.cit, P.P.16-17.

57

A revit~w of the empirical. studies hal ps

to identify gaps in the area, thereby providin~J

justi.fi cation fcl r an indepth further study 1i. ke the

pre!H?nt one, i;.':\nd wi 11 a 1 srJ bt~ useful f<) r f o rrnu L~ t in \.l

approriate export policies.

An attempt has been made in this chapter

to critically examine the studies undertaken with respect

to exports behaviour of developing and LDC countries and

intra regional trade patterns of the SAARC countries.

3.2 Exports and Economic Growth :- An Empirical Evidence.

An empirical assessment of the linkage

between export performance and economic growth is

important. Theoritical positions on the export-growth

neNus can , however, be very divergent. To classical

economists, economic historians and others protagonists

of free trade, trade is one of the most important vehicle

of international economic relations and more importantly

promotion of trade, is pomotion of economic growth,

especially for developing countries. *3

Good el·tport performance and "Outward --------------------------------------------------------

Haberler, G, "International Trade and Economic

Development,'' Economics of trade and development (edl,

pp. •103 ~ Samuelson,Paul.A. "Welfare Econorrd cs and

International trade",American Economics Review,June ·1938.

58

59

ori.entation" make major contribution to economic growth

by (a) increasing specialization and expanding the

efficient raising benefits of comparative advantage.

(bl Offering greater economies of scale. due

€mlargement of tht' effective market size.

lcl Affording greater capacity utilization and

ldllnducing more rapid technological change ;skills and

everi ente.rpreneurship.

Many empirical studi(:~S been

conducted so far to asses the role of exports in economic

o;)rowth.

Michaeley found a Spear-m.t:\n rank

correlation coefficient significant at the 1 percent

level, when he correlated average size of the annual

changes in the ratio of exports to GNP and per capita

growth rate fa 41 less developed countries for the period

1950-73.

Balas sa investigated the correlation

between export growth and GNP growth to measure the total

effect, direct as well as indirect, of exports on

economic growth. In his study with cross-secton data for

11 semi-industrial developing countries covering the

*4 Michaely, Michael; "E:<ports and Growth : An Empirical

Investigation", J au rnal of Development Economics, "1977'

Vol.4, No. ·1

GO

period 1960-73, he found a very high and significant

correlation coefficients for all the three periods, 1960-*5

66, 1966-73 and 1960-73. He also ran an inter-

country regression with domestic and foreign investment,

labour growth and export growth as explanatory variables

and found all the variables significant at 5% level. On

the basis of' his results Balc:o\ssa concluded the:\t ~~ ...... .

Ell·< port growth favourably effects the rate of economic

growth over and above the contribution of domestic and

forei.•Jn capital and labCHlr ••• ... 11

*6 Tyler replicated Balassa's Analysis by

employing a sample of 55 middle-income LDCs covering the

period 1960-77. He arrived at similar conclusions as that

of Balassa, namely, that countries which discriminate

against their export sectors would have to make do with

lower rates of economic growth.

In another study, Krueger in a cross-

*5. Balassa, Bela; "Exports and Economic Growth," Journal

of Development Economics 1978 Vol.S,No.2, P.P. 188-189.

*6. Tyler,William.G; "Growth and E>:port E:·:pansion in

Developing Countries". Some Empirical Evidence", Journal

of Development Economics,' 1981,Vol.9, No.1,P.P.121-131

*7. Krueger, A.O; "Foreign Trade Regimes and Economic

Development Liberization attempts and consequences "

1978, Ballinger, Cambridge, M.A.

61.

section investigation of 10 countries found that a 1

percent increase in the rate of growth of exports raises

the GNP growth by 0.06 percent.

The strong pasi tive

ob!ierved by Michaely, Balassa and Tyler .and the

regression employed by them for a cross-section of

countries indicates that export growth leads to economic

growth and that it is uniform among countries. This is

given the considerable in

economic structure exhibited by developing countries.

Empirical studies conducted by Emery,

Syran and Walsh also confirm that national income in

general is positively related to changes in

exports. Emery, an the basis of cross- smctional study,

covering 50 countries concludes that countries ought to

aim at 2.5 expansion of exports to obtain 1 percent *9

expansion of per capita real gross national product. Syran

and Walsh,reveal that 1 percent rise in exports is

associated with 0.37 percent rise in gross national

product in developed countries, and 0.33 percent in under

-developed countries. --------------------------------------------------------*B. Emery, Robert. F; " The Relation ·of E:·:ports and

Economic Growth", Kyklos, ·1967, Vo1.20, N0.2, PP.470-484.

*9. Syran, R.F. and Walsh, B.M.; "The Relation of' Exports

<lnd Economic growth : A note", Kyklos, •1968, Vol.2·f,

No.3. P.P.541-545.

62

However, a different school Of

thought headed by Raul Prebisch, Singer, Myrdal, Lewis,

Rbsenstein Rodan and Ragnar Nurkse argued that the

conclusions of the traditional theory lacked

and realism' and challenged the role of trade as a

transmitter of economic growth for developing countries .. *'10

Among the most challenging of the critics is Rau 1

Prebisch who maintains that trade can no longer serve as

an "Engine of economic growth" as it used to be in ttH?

past because the terms of trade which have been

considered as an important and convenient indicator for

the changes in welfare of the countries engaged in trade

have moved severally against the developing vis-a-vis the

advanced countries. * ·1·1

Mangat Ram made an attempt to examine empirically the

behavioural relation between exports, foreign capital

inflow and economic growth IG.D.PI in the less developed

areas particularly the South Asian Countries, during the

*·10. Prebisch, Raul; "Commercial Policy in the Under-

developed Countries", American Economic Review, •1959.

Vo1.49, P.P.251-273,

*11. Ram, Mangat; "E>:ports, External Capital Inflow and

Economic Growth in Developing Countries with special

reference to South Asian Countries". Indian Econo~lic

Journal, April-June 1980, Vol.27, No.4, P.P.20-26.

63

period 1967-75, with the help of cross section and time

series data. The positive relationship between exports

growth and rate of growth of gross-domestic product,

significant at 1 percent level, both in the overall

sample and compatible sample which covers 11 countries of

Asia, lends strong support to the trade-led growth

hypothesis. The coefficient of ratio of foreign capital

inflow to gross domestic product, though positive but

quite insignificant both in the averill and sub-samples,

indicating that foreign capital inflow did not have much

impact on the rate of growth of gross domestic product

during the period under study • .Yd2

Mukerjee made an attempt to study the export-growth

relationship in the case of India for the period 1950-81.

She too starts with the hypothesis that an increase in

the growth rate of exports will accelerate the economic

growth rate. The empirical investigation fails to accept

in a decisive manner that an increase in the growth rate

of exports will lead to a higher growth rate in national

income. An explanation for this inability on the part of

the exports to accelerate economic growth may be because

-------------------------------------------------------*'12. Mukerjee, Srnriti; "E>:ports and growth in India

(·1950-51- 1980-8'1>, An Empirical Investigation", Margin,

Jan 1987. PP 50-57.

64

of the fact that the expansionary effect on income

brought about by export growth, is largely lost in the

high import spending since imports are looked upon as

leakages from the income stream. *"13

Jn his !;tudy, Rati Ram has provided estimates and

two models of export-growth linkage for 88 LDCs on the

basis of time series data for 1960-82. Cross section

estimates of the models have also been found for several

LDCs for the sub-periods 1960-72 and 1973-82. The

results asserts the role of exports in growth.

3.3. Studies pertaining to the problem of Export

Jnstabili ty :-

It hii':\S been commonly held by traditional

economists like Cairncross, Meier and Nurkse that exports

of less developed countries <LDCsl fluctuate widely,

adding to the complexities of economic planning and

management adversely affecting the process of economic

development. But empirical study made by Coppock and

Macbean have claimed that there is no statistical

evidence to support the hypothesis that fluctuations in

export proceeds inflict any significant damage on the -----------~-------------------------------------------

*"13. Ram, Rati; "El-:ports and Economic growth in Developing

Countries Evidence from the time-series and cross-

section Data". Economic development and cultural change

1987 (Qctl Vol.36, No.1, PP. 51-63.

65

stability and growth of average under-developed country,

or that there is any relation between growth in percapita

real income and export instability. ;1·14

Macbaan, on the basis of a cross-sectional study of

35 LDCs, covering the period 1950-58, and using Coppock's

data, finds that there is no evidence of systematic

significant association between Iii the magnitude of

fluctuations in n<,\ti.on<d income and ~!:·:ports and Iii) thEl

growth rate of gross domestic product IG.D.Pl and export

instability and hence concludes that instability of

in general, is not detrimental to the stability

and long run growth of LDCs. Also he could not find a

clear association between the magnitude of fluctuations

in investment and in the importing power of exports in the

case of a sample of 20 under-developed countries. He has

also found that the impacts of the three alleged sources

of instability namely- export specialization in primary

products; commodity concentration and geographic

concentration of exports are small or insignificant,

offering little suppDrt to the instability of export

earnings.

Macbean's findings are in close confirmity with

those obtained by Coppock who found an insignificant

*14. Macbean, A.I; " E>:port Instability and Economic

Development ", Cambridge Mass: Harvard University Press,

1966.

bb

correlation coefficient lr) + 0.07 between the export

instability index and rate of growth of G.N.P or the

percentage increase in the percapita GNP for the period *15

of 1951-57 for all LDCs taken in the sample.

The findings of Macbean and Coppock have been

criticized and challenged severely by Maizals, Askari and *16

Wail, Glezakos, Naya and others. Sundrum's and Maizel's

evaluation of Macbean's work point out weaknesses in

statistical procedure and interpretation and even present

evidence to support the traditional view,largely by use

of Macbaan's data.

In his study, Glezakos pointed out the

methodological deficiencies in the empirical studies made

by Coppock and Macbean and made an attempt to test in a

more systematic way the effects of export instability on

*·15. Coppock,J.D.; "Intern,;,tional Economic Instability"

Newyork, Mcgraw Hill Book Co.1962.

*16. Sundrum R.M. ; " The Measurement of Export

Instability", June ·1967 and Maizels, A; 'Review of Export

Instability and Economic Development by A.I.Macbean",

American Economic Review, June 1968, PP 575-580.

*"17. Glezakos, Constantine; "Export Instability and

Economic Growth: A Statistical Verification", Economic

Development and Cultural Change, July 1973, Vol. 21, No.

4, PP. 670-678.

67

the economic growth of both the LDCs and the developed

countries CDCsl. The empirical evidence by Glezakos

supports the prior arguments that export instability is

generally larger in the LDCs than in the DCs and that

instability il detrimental to economic growth of the LDCs

but not in the DCs. *'18

Naya too reached similar conclusions as that

rJf GlezakrJs. His empirical results confirms that .the

degree of fluctuations in export earnings for the Asian

group of countries was greater than the other LDC group,

which in turn had a greater fluctuations than the DCs. He

also indicated that larger the value of exports, the

smaller the degree of fluctuations and the larger a

country's exports to its neighbouring countries, the

greater the level of export instability. The other

traditional sources which give rise to instability like

the commodity concentration and high specialization in

primary commodities

insignificant. *'19

were found statistically

Askari and Wail indicated that the decline in -

*'18. Naya, Seij i; "Fluctuations in E:<port Earnings and

Economic Pattern Asian Countries", Economic Development

and Cultural Change, July 1973, Vol.21, No.4, PP 657-662.

*'19. Askari and Wei 1, G. ; "Stabi 1 i ty of Export Earnings

of Developing Countries " Journal of Deve 1 o PIT•en t

Studies, ·1974.

68

export instability for the developed countries was more

significant than that for the developing countries. *20

Ranga Rajan and Soundarajan reached similar

conclusions as that of Glezakos and Naya and pointed out

that income growth and export instability are *2'1

i.nversely

related. Kenan and Voivadas too found evidence of a

strong inverse relationship between export instability

and the level of investment in developing countries. *22

Hassel, Pearaon and Fitch contradict earlier studies

and conclude that export receipts have only a negligible

impact on investment and thereby economic growtha *23

Halder and Richards examined the impact of commodity

concentration, geographic concentration and concentration

in the primary commodity exports, on the instability of

India's export sector. All the explanatory variables

were found insignificant.

*20. Ranga Rajan, C and Soundarajan V. ; "Impact of

Export Fluctuations in Income- A cross country Analysis",

Review of Economics and Statistics, August 1976.

·*2'1. Kenen, P.B. and Viovadas,C.S.; "E:·:port Instability

and Econornic Growth ", Kyklos, ·1972:,

*22. Hassel, B.F.; Pearson, S.R.; and Fitch,J; "Foreign

Exchange and Economic Development. An Empirical study of

selected Latin American countries " Review of Economics

and Statistics, 1972:.

69

ln a recent study, Sebartian reached similar

conclusions as that of Glazakos,Naya and others. The

study concludes that the export instability of growth

products is higher for the LDCs than for the DCs· and

proposed that export instability is to

Industrialization in a manner determined by the product

cycl~ theory of comparitive advantage and thus offered

explanation to why diversification has often failed to

reduce export instability in LDCs. *25

Mangat Ram examined statistically the impact of

ins tabi 1 icy in export earnings on the economic

development of LDCs during the period of 1960-76 and

found that the export instability in general has not

greviously hampered the rate of growth of exports of *26

LDCs. An empirical analysis by Das and Pant of India's

exports for 1960-BO precisely indicates that commodity

diversification has done little to promote export earning ---------------------------------------------------------

Halder, A and Richards, J • H; 11 Structural

characteristics of India's Foreign trade and its effects

on the Instability of E>:port Receipts", Indian Economic

Journal, Oct.- Dec.1973, Vol. 21, No.3.

*24. Sebertian, Alicia Muller; " A New Approach to the

Relationship between Export Instability and Economic

Development ", Economic Development and Cultural change,

Jan. 1988, Vol. 36, No. 2, PP. 217-235.

70

stability though geographical diversification seem& to •27

have been in the right direction. Debroy and Kurulkar

too argued that export instability is detrimental to

growth in the developing countries, more so than in the *l':~8

developed economies. Kaur and Singhal studied the

commodities wise export instability of India

Coppock's instability index.

It is thus clear from the above account that the

the available empirical evidences does not permit to draw

a definite conclusion concerning the consequences of

export instbility on economic development.

*25. A•Jgarwal, Mo'ln9at Ham; "E><port Earnings Instability

and Economic Development in Leas Developed countries ; A

Statistical Verific.-ation", Indian Economic Journal, Jan.·-

March 1982, Vol. 29., No.3,PP. 60-70.

*26. Das, Sandwip, K; and Pant, Manoj;

Diversification and Earnings Instability - Theory and

Evidence", Indian Economic Journal, March ·1989, Vol. 36,

No. 3, PP. 64-71.

Debroy, B and Kurulkar, S; "Measuring the

Instability of India's Foreign Trade'', Rajasthan Economic

Journal, ·1985, Vl. 9, P. ·1-·13.

*28. Singhal, K.C. and Kaur,Narinder; India's Export

Instability", Indian Economic Journal, March 1989,

Vol.36. No. 3. PP.72-77.

71

3.4 Studies relating to terms of trade and Balance of

payments 1-

The long run movement of the terms of trade

has continued to be a controversial issue in

liter;;ture. The cl<H>sic<d ~;chool believed that the term!; Oj-t:f""'J.'

would move in favour of"the developing countries, whereas

the modern economists disapproved this and claimed that

of trade would deteriorate for developinq

countries N

The most important contribution to the study

of the movement of terms of trade between developed and

under-developed countries was made by Raul Prebisch in

his report submitted to the United Nations in *29

1949. Singer, Poebisch and Myrdal visualised a secular

deterioration in the commodity terms of trade of

developing countries. This deterioration is associated

with unequal distribution of gains from increased

productivity, diverse cyclical movements of primary and

manufactured product prices and disparities in the growth

of demand for imports between developed and developing

countries. If the developed countries realised increased ---------------------------------------------------------*29. Morgan, Theodore; "Long-Run Terms of Trade between

Agricultural and Manufacturing", Economic development and

cultural change, Oct. 1959,No.8 and Kindleberger, C.P;

"The terms of Trade- A European case study" Newyork,1956.

72

productivity in the manufacturing sector, it is to be

then expected that productivity gains will be passed on

to the consumers in the form of reduced prices. As in the

case of developing countries, primary products are not

subject to productivity gains. It can therefore be

expected that the prices of manufactured goods will fal~

relative to primary products. It follows that

commodity terms of trade for developing countries will

have to improve and deteriorate for developed countries.

But factually the opposite happened. This is because, the

gains from increased productivity are being distributed

in the form of higher wages and profits rather than

reduced prices. On the other hand; the productivity gains

in case of primary products, though very. small are

distributed in the form of reduced prices.

This constrating behaviour of prices as a result of

productivity gains have been attributed to cyclical

behaviour, monopoly elements in industrial markets, trade

union bargaining strength, etc. Accordingly, the prices

of primary products rise sharply in the up-swing of the

trade cycle and fall more sharply in the down swing of

the trade cycle. The prices of manufactured rise less

sharply in the up-swing and do not fall in the down-swing

of the trade cycles, because of the rigidity of wages of

industrial labour.

73

Though in literature, much importance is given

to the commodity terms of trade. But, from the point of

view of economic dev€~lopment the "capacity to import .. c.:\S

reflected in income terms of trade appears to be more

:i.mpor·tant than corrunodity terms of trad~'· A country's

development programme may be constrained despite an

improvement in its commodity terms of trade, if its

capacity to import declines because of a fall in the

volume of exports, which is not offset sufficiently by

the improved commodity terms of trade. ;•3·1

The most favourable situation for a country

would be an improvement in the commodity terms of trade

as well as in income terms of trade. Perhaps the most

balanced empirical study on the terms of trade of *32

developing countries is that of Wilson, Sinha, Castru

as both the income and commodity terms of trade have been

e:<amined.

*30. Meir, G.M; "In International Trade and Development",

Harper arid Row, Newyork, 1963, PP.Lf.0-43.

*3·1. Spraos, T; "The Statistical Debate on The Net Bartel"

Terms of Trade between Primary commodities and Manu-

facturers," The Economic Journal, March 1980, PP.·107-·128.

Wilson, T ; Sinha,R.P ; and Castru, J.R. ; " The

Income Terms of Trade of Developed and Developing

Countries", The Economic Journal; ·1969.

7r1

Several studies have been undertaken to explore the

-influence of the terms of trade on the Balance of *:~::~

payments or trade balance, If the terms of trade are

to be treated as the most important variable i. n

determining the balance of payments,the country concerned

should be exporting only a few raw moterials whose supply

is inelastic in the short run. This situation can arise

in the case of an underdeveloped country.

If it is so, it will not be in a position either to

change the composition of its e~ports since reallocation

of resources in an underdeveloped country is expected to

be difficult or change their volume to offset the

influence of terms of trade on balance of payments. This

~;till leaves the possibiliy that a country can change

its volume of imports to influence the balance of

payments and thus offset the influence of terms of trade

on its balance of payments. Thus, only when a country

has inelastic demand for its imports and is unable to

shift resources to import substitutes, will the change in

its terms of trade have a decisive influence on its

balance of payments. *34

Chisti too made an attempt to study the long-term --------------------------------------------------------*33. Kindleberger, C.P ; "The Terms of Trade: A European

Case Study," Newyork, ·1956, PP. 276-79.

75

movement of the terms of trade of India for the period

·1930-68. In her attempt to study the effects of the

movements of the terms of trade on balance of trade, it

was found that out of the 38 cases cited, the movement of

the gross barter terms of trade and the balance of trade

was negative in 12 cases and positive in 26 casesn As

regards the net barter terms of trade and balance of

trade, in 17 cases their movement was positive and in 21

cases negative. On the basis of the past behaviour of the

terms of trade, she predicted that themovements in

India's terms of trade are not going to be

considerable in future, since India is expected to export

more of manufactures which are not subject to very wide

cyclical fluctuations in price. *35

In his attempt to study the effect of terms of

trade on trade balance, Mukerjee observed that the total

changes in the balance of-trade due to terms of trade ·~36

have not been very high consistently. Patel ex(amined

the direct effects of private foreign investment on the

*34. Chisti, Sumitra ; "India's Terms of Trade 1930-

68", Orient Longman Ltd., New Delhi, 1974.

*35. Mukerjee, Amitabha ; "Effects of Terms of Trade on

Trade Balance with Emphasis on Devaluation : General and

Sectoral Cases ", Indian Economic Journal, Vol. 30, No. 4

·19B3, PP. 27-37.

7G

balance of payments in India during 1960-70. Her study

surmised that the role of private foreign investment in

paying for imports is minor in India. *37

An empirical study undertaken by Ghosh to study the

impact of nominal devaluations on the current account

balance in the case of India for the period ·1973-87'

suggests that reliance on the exchange rate instrument

alone as a means of improving current deficits is

unlilcely to prove successful. This is because a policy of

continuous nominal devaluation creates expectation of

future depreciation which in turn operate to increase

current import expenditure and exert other negative

influences on the current account.

The present study is concerned with the effects of

terms of trade and export instability on balance of

payments of South Asian countries. However, a review

appeared to be necessary as a background to terms of

trade and balance of payments of developing countries and

to put things into proper perspectives.

*36. Patel, Meena ; "Private FoFei•Jn Investment and

Balance of Po:;yments Effects in India During ·1960-70",

Indian Economic Journal, Vol. 31, No.3 Jan.-March 1984,

PP.62-70.

*37. Ghosh, Jayati ; "E:-:change Rates and Trade Balance

Some Aspects of Recent Ind~an E:-:perience ", Economic and

Political Weekly, March 3, 1990.

77 '

3.5 Studies on Intra-SAARC Trade=-

Many studies have been made so far in the field of

Intra-SAARC Trade. Among them, notable are those made by

Sharan, Bhatt, Suwati, Mukerjee, Singh, Madan and Debroy. l<·3H

Sharan has unravelled soma strong symptoms of the ailing *a9

intra-BAARC trade in the 1980's. According to Suwati ,

the high priority given to the imports of capital and

intermediate goods which are usually supplied by the

developed countries is one of the main reason for the l<-40

weakening Intra-SAARC trade. Subbarao too has given

similar reasons for the weakening South-South trade as that *4· ·1

of Suwati. Mukerjee made an attempt to identify the areas

in services and industries, where the SAARC member

countries can co-operate and contribute to combat their

*38. Sharan, Vyuptakesh "Intra-SAARC Trade: some

guidelines", Economic Times, Jan. 9, ·1'~89, P 5:3-6.

*39. Suwati, Chi tra "Trade and SAARC flegional

requirements should 9et priority", Journal of Social

Studies, No. 2, ·1984, P. 5. <40> Subbaroa, Duvvuri

"South South Trade: Problems and Prospects", Economic

Times, 23 May, 1989, P. 5 : 3-6.

*4·1. Mukerjee, I.N. ; "Trade eHpansion in South Asia : An

Indian Perspective", South - Asia Journal, Oct •• - Dec.

·1987, (1)2, P.P.163-90. *42

trade and balance of payments problems. Bhatt too has

78

identified the commodities in which there can be intra­*4a

SAARC cooperation and trade. Madan is of the view

that problems like trade deficit can be settled by

adjustment between BAARC member countries. E:-:change

arrangements and exchange rate system should be improved

and centres of research for the South-Asian ct1untry' s

proble~s should be installed for economic *44

co-oper"tion

and development. Debroy feels that harmonization and

co-ordination of trade policies and working out of market

sharing and payment arrangements would be needed to boost

intra-SAARC trade.

The studie& reviewed in this field doesn't seem to

be very satisfactory as more emphasis has been given to

the reasons for the ailing Intra-SAARC trade without

laying forward any concrate policy implications.

*42. E<r.att, P.R.; "Trade Flows in South Asia ", Man and

Development 6131 Sept. 1984, P.104-16; Indian Quarterly,

4013-41, July- Dec. 1984, P. 287-300.

*43. Madan, B.K ; "Towards monetary co-operation in South

Asia", New Delhi, Concept, ·1986.

*44. Debroy, Bibek, "SAARC Region: Trends in Trade

Flows",. Economic Times, 5 July, 1989, P.5 : 36 ~ 6 July

-1989, P.S : 3-6.

79

The above review of the Empirical studies do

not permit us to draw firm conclusions either with regard

to export orientation or in respect of the consequences

of export instability. However, the above studies

indicates the importance of e::ports and the need for

stabilisation of export earnings.

One shortcoming that appears to characterize

the previous studies is that most of the empirical

investigations are based on cross-section data covering

various groups of developing and LDCs for different time

periods. In view of this, an attempt is made to examine

afresh the trade and payments problems of selected South-

Asian countries on a time-series basis for the period

1970-87.

3.6 Methodology of the present study:-

Different techniques have been employed in the

present study to analyse trends in trade, concentration,

instability and terms of trade and to bring out the

implications of these on balance of payments and economic

development.

80

3.6 A Trend Analysis:-

Trade trends are analysed by fitting an exponential

function of the following form for the value data

pertaining to exports and imports.

Log yt • a + bt. where,

yt refers to the value of exports/imports in year t.

'b' is the coefficient (here it is growth rate), and 't'

refen; to time.

3,6 B Measures of Export Instability :-

To estimate the magnitude of instability in exports

and import in terms of its value, volume !quantum) and

price Cper unit value), we have adopted the log variance

method developed by J.D.Coppock.

Algebraically, it i '!T~ e}{ pre-:,sed as follows: 2

I \ log !{ t + •1 - ITt

v log = E -----------\ }{ t I

N

The instability Index II-I> = (antilog v(vlog-1) x 100

where, xt is the value of a country's number in year t;

N is the number of years -1 ; m is the arithmetic mean of

the differences between the logs of xt and xt + 1 and V

log is the logarithmic variance of the series.

81

The following steps are involved in the construction

of instability index :

1. Logarithms are obtained for the annual value of each

variable.

2. The logarithm value of year 2 is subtracted from the

logarithm value of year 1, etc. in order to get the first

differences of the logarithms.

3. The arithmetic mean of logarithms first differences is

then obtained.

4. The logarithm mean is then subtracted from each year

to year logarithm first differences in order to obtain

the logarithmic difference between the actual and average

(or trendl year to year logarithmic differences.

5. The logarithmic differences from the trend are them

squared, summed up and divided by the number of years

minus one. The resulting value is referred to as the

"lo9 va.riance 11•

The log variance method is adopted in this study in

view of its superiority over the other methods and its

appropriateness or suitability to the present study.

Instability indices have been computed for the

overall period and the various sub-periods 1970-75, 1976-

80, 1980-87.

To serve our purpose, an attempt has also been made

to measure the year to year instbility in exports and

82

other related items using a technique as those used *45

recently by Macbean and Nyugen 11980).

I a instability measure t

I \ 2

I '"I I Xt -Xt> IXt i t

\ I where, Xt is the total exports of a country in time t.

is the trend value obtained by regressing xt on

Instability is generally expected to depend on

corr.rnodi ty concentration, geo9raphic concentre:ttionr

primary product ratio and exchange rata fluctuations. To

know the effect of these variables on export instability,

an attempt is made to compute thE! concentration

coefficient for thQ selected items. The technique adopted

to estimate the concentration coefficient are discussed

below.

3.6 c Measurement of Commodity and Geographic

-------------------------------------------Concentration :-

Accordingly, coefficient of commodity

concentration is defined as

n

r 2 cc = ·100 E I Xi I X)

i=1

*45. Macbean, A. and Nyu9en,D.T.;"Commodity Concentration

and E:<port Earnings Instability: A Mathematical Analysis",

Economic journal,·1980, Vol. 90, PP. 254-262.

83

where, CC is the commodity concentration coefficient.

x is the value of exports or imports of commodity i. i

x is the total value of exports.

Geographic or country concentration coefficients are

computed in a similar manner as that of commodity

concentration coefficient.

The geographic or country concentration coefficient is

defined as :

GC - 100 I n

E J=1

2 <Xj/Xl l

x refers to a country's exports or imports of j

th goods to the J country.

3.6 D. Correlation and Regression analysis :-

To study the relationship between export growth and

economic growth of the major South Asian countries, Karl

Pearson's and Spearman's rank correlation coefficients

has been estimated. The cause-effect relationship

between export instability and the determinants of

export instability are analysed by fitting a regression

model for the period 1970-75. The cause effect

relationship between the value of exports and the

explanatory variables have also been analysed by fitting

the regression model as discussed below :-

xt = f ( e, G, P, E l.

84

where,

xt = the country's export instability or the value of

exports in absolute terms.

e = commodity concentration.

G • geographic concentration.

P • primary product ratio.

E • instability in exchange rate.

3.6 E Gains from trade :-

The gains from trade or trade gains has

been calculated from income terms of trade and quantity

I \ tr<.~de gains - Ch! uV :·:/uV M l - Gx

1 1 \ I

where, I \

G:-: uV HluV M 1 1

is the income terms of trade,

\ I

C uV x = Unit value index of exports and 1

uV M = unit value inde:: of imports ) I

Gx • Quantity of exports.

The concept,." gains from trade 11 or 11 trade gains "

was originally used by the United Nations study group

which studied the repercussions of the movements of the

terms of trade on under-developed countries. Later it

was used by Kindleberger in his study of "terms of trade

-A European case study in 1956".

85

The concept, 'gains from trade' aims at measuring

gains or losses from terms of trade; in short gains or

losses from trade.

3.7 Nature and source of data :-

This study is entirely based on secondary

data collected from the IMF and UN Publications and the

World Bank reports.

Time series data on exports,and imports country-

wise and region-wise in terms of value, volume and price

lper unit value) are drawn from the International

Financial Statistics yearbook, IMF publication and

International and Statistics year book, U.N. Publication.

Cormr.od i ty concentration has been estimated by

identifying the top ten commodities exported and imported

by the South Asian countries at three digit level of

SITC. The data is collected from foreign trade statistics

of Asia and Pacific, U.N.Publication. The geographical

distribution of exports and imports of the SAARC

countries by broad country groups are collected from

Direction of Trade Statistics year book, IMF Publication.

Data on the barter terms of trade indexes and

income terms of trade indexes have been collected from

"UNCTAD, International trade and development statistics",

U.N.Publication, 1988. Data on the G.D.P. and exports of

the individual South-Asian countires is their national

currency have been collected from the statistical year

book for Asia and Pacific, CU.N.Publicationl

•1989.

8G

·1985 and

The Debt Tables an> collected from World Bank; "World

Debt Table~>. EHtel"n,,ll Debt of developing countries".

1982-83 edition, 1983-84 edition and 1989-1990 edition.

The Data on the Balance of Payments are collected from

ttH> "B,•lanc!1 of paymtmts year book,l.M.F" ·1989 and other

i s~;ues