Academic journal article The Journal of Developing Areas

The Export-Income Relationship in Developing Countries: Evidence from Panel Cointegration

Academic journal article The Journal of Developing Areas

The Export-Income Relationship in Developing Countries: Evidence from Panel Cointegration

Article excerpt

ABSTRACT

This paper quantifies the contribution of exports to economic growth in developing countries. We apply recently developed panel cointegration methods which admit structural breaks to examine bivariate export-income relationships for a panel of 47 developing countries for annual data for 1970-2004. Results show that long-run relationships exist and there is bi-directional causality between exports and income; structural breaks occur in most country-specific relationships and most occur in the 1980s following the debt crisis of 1981-82; the income-export elasticity is 0.22 while the export-income elasticity is 1.13. Structural differences also exist in the relationships by broad income group and the impact of exports on income increases while that of income on exports falls as income increases. Export-promotion policies are not misplaced and the trade liberalisation policies advocated and sometimes imposed by the World Bank which aim to stimulate economic development seem justified but should by tailored to individual country needs.

JEL Classification: O40, C33

Keywords: Export-Income Relationship, Developing Countries, Panel Cointegration

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The export-income relationship has been a central focus of the trade and development literature over the last 30 years. Competing theories provide alternative hypotheses of export-led growth, growth-led exports, and of causality in both directions, and numerous empirical studies examine the relationship with mixed and contradictory results. Most provide evidence that the relationship is significant, but there is little consensus either on the direction of causality or on the marginal impact of one variable on the other. The sources of these mixed results are twofold: first, many studies are country-specific, and second there are well-known shortcomings of studies that use cointegration tests with modest sample sizes. This paper attempts to address these concerns.

Few studies use panel data to analyse the export-income relationship but one exception is Levin and Raut (1997) which examines 30 'semi-industrialised' countries and finds that increases in exports can play a significant role in economic growth. We extend this analysis to developing countries to provide general insights into the export-income nexus. A panel dataset of 47 countries over a relatively long time period of 1970-2004 is examined to exploit both their cross-section and time-series dimensions, and we use and the recently developed panel cointegration method of Westerlund (2006). This method is particularly appropriate here because it allows for the estimation of endogenously- determined and heterogeneous structural breaks which may be caused for example by the debt crisis of 1981-82 and/or the implementation of trade liberalisation policies. We also examine the existence and nature of the relationship for three sub-panels of countries by broad income grouping since there is some evidence to suggest that it differs according to the level of income. A second line of inquiry is that we test for the direction of causality between exports and income in the panel following Canning and Pedroni (2008).

Our contribution to the literature is threefold: first, we examine the export-income relationship in developing countries using panel cointegration methods; second, we include country-specific structural breaks; and third, we test for causality between exports and income. The following sections outline alternative explanations of the export-income relationship and review some empirical literature, detail our empirical model, discuss the data and results, and a final section summarises and concludes.

BACKGROUND

Export-led growth has four explanations. First following short-run Keynesian arguments, export growth leads to income growth via the foreign trade multiplier. Second, foreign exchange from exports can be used to finance imported manufactured and capital goods and technology, which contribute to growth (Chenery and Strout, 1966). …

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