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