Estimation of Import and Export Demand Functions Using Bilateral Trade Data

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Estimation of import and export demand functions using bilateral trade data: The case of Pakistan Peer-reviewed and Open access journal ISSN: 1804-1205 | | BEH, September 2011 BEH - Business and Economic Horizons Volume 6 | Issue 3 | September 2011 |pp. 40-53

Estimation of import and export demand functions using bilateral trade data: The case of Pakistan Jahanzaib Haider, Muhammad Afzal, Farah Riaz Department of Management Sciences COMSATS Institute of Information Technology, Pakistan e-mail:

We estimated the import and export elasticities of Pakistan trade with traditional trade partners and some Asian countries to see the dynamics of Pakistan trade from 1973 to 2008. OLS results suggest that income is the principal determinant of exports and imports. Pakistan exports are cointegrated with Japan and USA while the imports are cointegrated with UAE and USA. Pakistan imports and exports are cointegrated with Bangladesh and Sri Lanka but not with India and China. Income and exchange rate are both important determinants of foreign trade. Continuing its trade with traditional partners and making efforts for greater market access to USA and EU, Pakistan should make efforts to increase its trade with Asian countries notably China and India because both are fast growing economies and have huge market. JEL Classifications: F01, C51 Keywords: Import and export elasticities, Pakistan, Asian countries, cointegration.


International trade has played an important role in the development of both developed and underdeveloped countries because countries are dependent on one another due to uneven distribution of resources. Export of agricultural and other primary commodities accounts for a major share of developing countries income. Besides export dependence developing countries are also heavily dependent on the import of diverse capital and consumer goods to feed their industries and satisfy their peoples’ consumption needs. Developing countries have been facing balance of payments (BoPs) problems because of divergence in imports and exports and hence the importance of foreign trade is obvious. Pakistan is an important country of the world. However, in terms of trade it does not enjoy a significant share. Recognizing the importance of trade, different governments have adopted different policies about trade according to international economy demands. Precarious nature of the Pakistan’s economy was acknowledged by the government soon after independence in 1947and a strategy of import substitution (IS) industrialization was adopted through over-valued exchange rate, use of quantitative controls on imports and the export taxes on principal agricultural exports: cotton and jute. Though some 1950s policies were continued in 1960s, a number of new policies in the realm of economic management were adopted. Pakistan’s economy suffered as well as benefited from international events in 1970s. Pakistan started liberalizing the economy with the help of IMF and World Bank in 1982-83 with a view to improving the efficiency of the economy by increasing the role of the private sector. Most of these reforms were implemented by mid-1980s. The process of liberalization started during 6th Five-Year-Plan (1983-88) and was implemented with great force after 1988. The government pursued vigorous trade liberalization in the beginning of 1990s. Like many other developing countries, Pakistan has made significant efforts to integrate its economy with rest of the world through - 40 © 2011 Prague Development Center

Estimation of import and export demand functions using bilateral trade data: The case of Pakistan | BEH, September 2011

foreign trade, investment and other macroeconomic policies (Afzal 2006a). Pakistan’s trade suffers from a number of problems that includes concentration in composition and markets, lack of market access to major trading partners EU (European Union)...
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