POLICY RESEARCH WORKING PAPER 2162
Quantifying the F iscal A general equilibrium tax
model estimated for -(0
Effects of Trade R1{eform countries provides a s mple
but rigorous method for
Sbantayanan Devarajan estimating the fiscal impact of
trade reform
Delfin S. Go
Hongyz Li
The World Bank
Development Research Group
Public Economics U
August 1999
POLICY RESEARCH WORKING PAPER 2162
Summary findings
Using a tax model of an open economy, Devarajan, Go, For imports to grow and tariff collection to
and Li provide a simple but rigorous method for compensate for the tax cut, the import elasticity has to
estimating the fiscal impact of trade reform. be high. Because of the balance of trade constraint,
Both the direction and the magnitude of the fiscal however, imports cannot substitute for domestic goods
consequences of trade reform depend on the elasticities unless supply is able to switch toward exports. Hence,
of substitution and transformation between foreign and the export transformation elasticity has to be high as
domestic goods, so they provide empirical estimates of well.
those elasticities. As substitution possibilities between foreign and
They also discuss the implications of their analysis for domestic goods increase, a tariff reform can theoretically
public revenue. be self-financing. But if the elasticities are less than
In general, they find that it matters what the values of "large," tax revenue will fall with tariff reduction and
the two elasticities are relative to each other. If only one further fiscal adjustments will be necessary.
of the elasticities is low (close to zero), revenue will drop Devarajan, Go, and Li provide empirical estimates of
unequivocally as a result of tariff reform, reaching close the possible range of values for the elasticities of about
to the maximum drop whether or not the other elasticity 60 countries, using various approaches. The elasticities
is high. range from 0 to only 3 in most cases - nowhere near
the point at which tariff reform can be self-financing.
This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to
develop and apply tools to analyze fiscal reform. Copies of the paper are available free from the World Bank, 1818 H Street
NW, Washington, DC 20433. Please contact Hedy Sladovich, room MC2-609, telephone 202-473-7698, fax 202-522-
1154, Internet address hsladovich@worldbank.org. Policy Research Working Papers are also posted on the Web at http:/
/www.worldbank.org/html'dec/Publications/Workpapers/home.html. The authors may be contacted at sdevarajan
@worldbank.org, dgo@worldbank.org. August 1999. (53 pages)
The Policy Research Working Paper Series dissemintates the findings of work in progress to encourage the exchange of ideas about
development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The
papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this
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countries they represent.
Produced by the Policy Research Dissemination Center
Quantifying the fiscal effects of trade reform:
A general equilibrium model estimated for 60 countries
Shantayanan Devarajan, The World Bank
Delfin S. Go, The World Bank
Hongyi Li, Chinese University of Hong Kong*
We thank Will Martin and DoDiinique van der Mensbrugghe for several helpful comments.
1. Introduction
Despite compelling evidence of its many benefits, trade liberalization remains an
unfinished business in many parts of the world, particularly Sub-Saharan Africa.
One reason is that many developing countries today are still dependent on import
tariffs for revenue. Governments fear trade reform will lead to significant revenue
losses in the short run. In Sub-Saharan Africa trade taxes account for 27 percent
of total revenue of governments.1 For some countries-C6te d'Ivoire, The Gam-
bia, Madagascar, Mali, Mauritius, Niger, Sao Tome and Principe, and Swaziland,
for example-the dependence on trade taxes is higher than 40 percent.
A number of authors (Branson et al. (1992), Mitra (1992), and Greenaway
and Milner (1991)) have therefore emphasized the importance of concomitant
fiscal adjustment to make trade reform sustainable. But what should the size of
the fiscal adjustment be? What determines the magnitude of the fiscal impact?
How can it be minimized? Will the liberalization ever be self-financing? Answers
to these questions typically require an elaborate tax model with its healthy, not
to say rude, appetite for data. As a result, policymakers rarely have the answers
when they need them. Trade reform is then either not undertaken, or done so
with little knowledge of its fiscal consequences.
'Excluding South Africa and Nigeria; based on recent data (1992) from the World Bank's
African Development Indicators 1996.
1
The purpose of this paper is to present the simplest structure of an open econ-
omy that provides a quick but clear method of quantifying the fiscal consequences
of trade reform. The model can be solved analytically and we provide intuitive
formulae for understanding the fiscal effects of tariff changes. In addition, we
provide empirical estimates of the model's key parameters for about 60 countries.
The fiscal impact of a tariff reduction will depend directly on the size of the
tariff cut, the response of imports to the tax change, and the relative importance of
import tariffs as a source of government revenue. It will also depend indirectly on
what happens to the other tax bases and how they in turn will affect revenue. The
key to revenue performance, therefore, is how all the tax bases will change with the
reform. To estimate the direct and indirect fiscal consequences, economists have
often employed general-equilibrium tax models. These tax models can be quite
complicated and difficult to build, particularly in view of the data constraints
in many developing countries. Their complexity also makes it hard to sort out
the relative importance of various factors.2 To seek an easier but still rigorous
alternative, to better understand how tax models work, and to identify what
affects public revenue, this paper takes a simple analytic representation of a large
class of empirical general-equilibrium models, a prototypical framework that has
2A recent, extensive discussion of the structure of applied general equilibrium models may
be found in Ginsburg and Keyzer (1997). Past surveys are also found in Robinson (1989) or
Shoven and Whalley (1984).
2
been shown in Devarajan et al. (1993, 1997) to anticipate many of the significant
results of trade-focused general-equilibrium models. In this paper, we extend
the framework to analyze taxes and their fiscal and welfare impact. The goal is
not to capture the detailed economic and tax structure of a particular country,
nor to arrive at precise estimates of the direct and indirect fiscal and welfare
consequences of trade reform, but rather to isolate key parameters and ascertain
their empirical magnitudes, and to provide a quick but clear way to quantify the
fiscal consequences.3
The rest of the paper is divided into three sections. Section 2 discusses the
specifications of the simple open2-economy framework and its applications towards
macro-fiscal policy. Key analytical results are derived. Section 3 provides esti-
mates of these parameters for different countries and describe estimation issues
and problems. A summary of conclusions follows in Section 4.
3This framework can be numerically implemented using widely available data from national
and fiscal accounts and in a user-friendly spreadsheet format (Devarajan, Go, Lewis, Robinson,
and Sinko (1997)). It has also been adapted to look at the fiscal impact of a regional custom
union, see Devarajan, Go, Suthiwart-Narueput, and Voss (1997), as well as the dynamic impact
of trade and macro policy, see Devarajan and Go (1998).
3
2. The model
2.1. The 1-2-3 model with taxation
Total public revenue, R, is defined as the sum of revenue intakes R, from various
taxes. Consider the two most important taxes in developing countries-an import
tariff tm and a domestic indirect tax. The latter may be a tax on domestic
spending, tq, which applies equally to the domestic goods and imports; or, it
may be a tax on production of domestic goods, td, but not on the production of
exports, in which case exports serve as an untaxed sector. That is,
R =ERi = tm e 7rmM + tqPqQ + tdPdD (2.1)
where irm is the world price, and M the quantity of imports; e is the foreign
exchange rate; Pq is the price of domestic demand Q; and Pd is the producer
price of domestic goods D.
The model in which the tax instruments are considered is a simple general
equilibrium model that has one country, two activities, and three goods, or "1-2-
3 model" (Devarajan et al. (1993, 1997)). The basic nature of the 1-2-3 model
is a modified Salter-Swan methodology that separates the economy into three
distinct goods: exports E, imports M, and a 'domestic' or nontraded goods D.
The production of exports and domestic goods is defined by a transformation
4
process marked by a constant elasticity of transformation Q,
X a (AL" + (1 - A)D-?) t (2.2)
where Q = -i- is the elasticity of transformation and a is a shift parameter.
Output X is exogenous and constant given fixed factor endowment. From profit-
maximizing behavior, the relative amount of exports and domestic goods pro-
duced is determined by their relative prices and Q:
E (PE) (2.3)
D Pf,
where k is a constant equal to (19A)n ; PD is the tax-adjusted producer price
PD(1 + td); given the world price of exports 7rE, pE = 7E e is their domestic
price.
Consumers' demand is satisfied by imports and domestic goods and is defined
by a constant elasticity of substitution (CES) utility over the two goods
Q = e (6M-P + (1 - 6)D-P) P (2.4)
where a = is the elasticity of substitution and e is a CES shift parameter. The
proportion of imports and domestic goods consumed is affected by their relative
5
prices and a from the following first-order condition:
D (PM) (2.5)
where k' is a constant. To buy Q, consumers receive income from pro-
duction plus a lump-sum transfer from government, i.e., their budget constraint
is
PQ(1 + tq)Q = PxX + R (2.6)
The expenditure tax tq that is imposed on Q applies equally to M and D.
We assume the economy is in trade balance so that:
tlM - 7teE = O (2.7)
In addition, there are two price identities:
PX peE+PdD (2.8)
M 1D
PQ Pm. Q +P (2.9)
A few remarks are in order. The model implies imperfect substitution be-
6
tween domestic and foreign goods. Even if the 'law of one price' prevails and
perfect substitution is found amDng specific commodities, the elasticities of the
aggregated goods will still be less than infinity whenever aggregation requires dif-
ferent weights because of preferences, endowment, and trade specialization.4 In
more practical terms, the CET and CES formulations allow one to avoid corner
solutions or complete specialization. Because they are well-defined and intuitive
to use, the two functions are popular and serve as key relationships in more dis-
aggregated models as well.5 In both the aggregated and disaggregated cases, it
is obvious that the elasticities of the CES and CET functions will play key roles
in the numerical outcomes of the models.
The model requires a price numeraire and the foreign exchange rate e is
used. There are eight variables (R, E, M, D, Q, Fd, FiX, FQ) in nine equations.
But by Walras' law, one of the equation is redundant so that one equation may
be dropped.
4Devarajan (1997) discusses the problem of defining tradable and non-tradable goods in the
context of determining the real exchange rate misalignment in the CFA zone.
5With more disaggregation, domestic and foreign goods may be indexed over groups of com-
modities, i.e., Ei, Mi, Di,where i =food, various manufactures etc. For each class of commodities,
Qi, Xi are then defined by their respective CES and CET functions. Cobb-Douglas, a special
case, is sometimes used.
In the supply side, note that wi1h fixed factors, the single output X is also fixed. With
disaggregation, resource reallocation from relative price shocks and interindustry purchases come
into play; a production function fcr each category of output and the specification of factor
markets are necessary.
7
2.2. Consequences of a tariff reform
To derive the fiscal and welfare effects of a tariff reform, we first log-differentiate
the system of equations (1)-(7), noting that (except for tm) the growth rates of
other exogenous variables (X, e, rm, nre, td, tq) are zeroes:6
R=6m(tmn + M) + OR (p, + Q) + +OdR P+D)(.0
-? = R d+f)(2.10)
where OR = R iS the relative weight of the tax revenue from source i and, hence,
E = 1. Even in this simple set-up, it is clear that the fiscal impact of a tariff
reduction depends not only on im, M, and kRn, but also on D, Q, Pd, P, and the
revenue weights of domestic taxes Of"'s.
The growth rate of X (= 0) and Q are expressed as 'weighted' averages of the
growth rates of foreign and domestic goods:
Ox= E + oxD (2.11)
Q= oM + oD (2.12)
where the various weights are defined by the relative importance of foreign and
domestic goods and the CET and CES parameters:
6That , a a =
8
SX = AS(E )7
OQ= be(M)p
02= (1 - b)C-P (D)P
Equation 2.12 is also the change in utility or welfare. The first-order conditions
in turn are:
E -D b - = Jd (2.13)
M-D = a (Pd-WtJ.m) (2.14)
In equation 2.14, wt, - is the price wedge created by t,
The budget constraint yields
Pq + Q (1 - OR)Pz + 6R (2.15)
where O{ is the relative weiglat of the lump-sum tax transfer in household income.
9
The trade balance equation implies
M=E (2.16)
Finally,
P x =pXt + (1 - PX)(d + ) (2.17)
where Px = -PxI'E exports' share in GDP.
2.2.1. Impact on Pd, D, M, and E
An important factor in the revenue impact is the change in the price of domestic
good Pd, the key endogenous price of the model. Given that world prices are ex-
ogenous, Pd determines the change in the real exchange rate, which in turn affect
the allocation of the three goods in the model M, E,and D through the optimal
conditions, 2.3 and 2.5. Through its effects on Pg and P:, Pd also influences the
behavior of the domestic tax bases Q and X. A specific expression for Pd can be
derived (from equations 2.13, 2.14, and 2.16):7
A
7For an expression of Pd in terms of possible terms-of-trade shocks and their implications,
see Devarajan et. al. (1993).
10
Pd = + itm (2.18)
All parameters in the coefficieni- ° are positive so that Pd varies directly with
as expected; a rise (reduction) in tariff protection will raise (lower) the price
of the import substitute.
A precise expression for exports can also be obtained (from 2.11, 2.13, and
2.18):
E =- i '1: t^m (2.19)
1+ /02
where P I and /d2 = E 8 Both 01 and P2 are positive so that im, working
like an export tax, affects D negatively as expected.
FRom the current account balance (2.16), the change in imports is the same
as that of exports, i.e., M = E:. Solving for D, we note that the added protection
afforded by a positive tm will encourage the production of domestic or 'non-traded'
goods:
8From equation 2.11, define 02 = O . Using the usual budget equations for a CET function
or the first-condition 2.3 to remove A from the O's, it can be shown that 62 = . Finally,
initializing prices to 1 in the base year, 12 = D
11
31I02-
b = +2 t+ (2.20)
Because of its modified Salter-Swan formulation, the behavior of the 1-2-3
model is shown to be consistent with traditional trade theory. In addition, the
impact on E, M, D, and Pd, depend on values of the trade elasticities a and Q,
the size of the tax wedge wt., and the relative importance of trade 02. How the
parameters affect revenue and welfare are examined next.
2.3. Revenue impact
2.3.1. Case 1: tm is the only tax
Take the simplest case in which there are no domestic taxes, so that tq = 0,
td =0, O, =0, O, o =0, and OR = 1. From 2.10, it is clear that revenue will
depend on whether imports expand sufficiently to offset the cut in tariffs:
f? = tm + M
Substituting the previous solution for M, we find that
1= ki,m
12
where
r1 (u +2 )(1 + 32)
Can k, be negative? In other words, can there be a Laffer curve for tariffs?
k1 is negative if
O*Wtm~i >
(a + Q!)(1 + 02)
an (1> +2) (2.21)
a +Q wt,
For non zero exports (f2 -D > 0) and positive tariffs (0 < wtm < 1), note that
D
(1+12) > 1. Hence, the left-hand side, +Q, has to be sufficiently greater than 1,
a condition that may be satisfied if both a and Q are high.
How high should the elasticities be? Take some feasible numerical values,
=2 2 and wLm = 0.2 (i.e., t,, = 0.25), Figure 2.1 shows the revenue impact for
a 50 percent reduction in tarilfs for different values of a and Q.
A few observations can be made. Even if just one of the elasticities is low
(close to zero), revenue will decline unequivocally, reaching close to the maximum
drop regardless whether the other elasticity is high. This is because for imports
to grow and tariff collection to compensate for the tax cut, or has to be high.
Because of the balance of trade constraint however, imports cannot substitute
for domestic goods unless supply is able to switch towards exports. Hence, Q
13
A
R 0
0~~~~~~~~~~~~
40~~~~
R ' t w t<~~~~~40
Figure 2.1: tm is the only tax
has to be high as well. In the example given, both a and Q have to be greater
than 20 before revenue growth becomes really positive. Hence as substitution
possibilities between foreign and domestic goods increase, a tariff reform may be
self-financing. Conversely, if the elasticities are less than 'large', tax revenue will
fall with tariff reduction and further fiscal adjustments are necessary. The precise
value of a or Q is of course an empirical issue, which we will examine in section
3. Note further that the higher is the initial tariff (higher wtm) the more likely
will the tariff reduction be self-financing.
14
2.3,2. Case 2: There is also a domestic expenditure tax tq
What would happen to revenue if there were a domestic tax? Take the case in
which the only domestic tax is an expenditure tax on Q, so that td =, OR = O
and
R R (tm" + M3) + (1 _ OR) ( )(.2
R=O 7n m + ~~~~~~~~~(2.22)
There are two possible opposing effects on the domestic tax base - Pq will fall
while Q may rise because of the cheaper imports. To investigate their net effects,
note that (Pq + Q) is an average of P. and R in 2.15, and an expression for P,
is available in 2.17. Using the previous solutions for Pd, D, M and E, which are
unaffected by the introduction of tq, we are also able to derive R in terms of the
policy change tm:
f = k2tm and kz = Xi (2.23)
X2
where
OR.1 = P, (t-awt,sQa+ rSt'. ( ntg),
Xi a j+~Ytn&+7t T I)/2)
+ 1 (awt (1 + 2 ( + Q) W 2 (1 0E) B26E)
15
and
X2 = (1qOR9Y) (a + Q +Wtm a + Q )
X2 q Rk \o+W) /32)
The denominator of the coefficient k2 is always positive, i.e., X2 > 0. The numer-
ator X1 is generally positive unless a and Q are sufficiently high so that (-uWtmtQ)
in the first part of the expression dominates.
Substituting the same values of the parameters in Case I and further assuming
that tariff revenue is now one third of total revenue, OR = 0.33 and that the tax
rebate is 20 percent of income, OR = 0.33. Figure 2.2 shows that the revenue
profile is the sanie as Case 1. Note that for low elasticities, the revenue decline is
less than Case 1 since tariff revenue is now less important. In this case however,
both elasticities now have to be a lot greater than 40 before the revenue impact
is positive. The reason is that, although with a higher elasticity, the greater is
the increase in M, the response of D goes in the opposite direction, rendering the
effect on Q relatively neutral. Thus, policy reform generally has a negative net
effect on the domestic tax base and consequently, imports have to expand a lot
more to raise revenue. Nevertheless, like Case 1, a tariff reform can still finance
itself with sufficiently high elasticities.
16
ARRO. 180
good u otoneprs. q- O,/- n
Sub3 Cstitutin prevodusoltions for is, impoand on weufindothat
-0.1 = OR 601_O) p
0k.i (2.25)
17
-0.2
kO.4
R 8
-0.
-0.8
0 40
4 020/20
Figure 2.3: A tax on D but E untaxed
where
k3 = ( 1 + [(1(-IO)OWtm + 2 (a + Q Wt-mWe + (0 +rn2)]
Here the result is more direct. If O6; < 0.5, that is, tariff revenue does not
dominate total revenue, k3 is always positive, regardless of the values of a and
Q. FRom equation 2.24 Pd and D, and thus revenue from the domestic tax base,
will tend to fall as both ao and Ql rise. Retaining the parameter values in Case
2, we confirm this in Figure 2.3. Hence, unlike Case 1 and 2, public revenue will
always fall and it will decrease more the higher the elasticities.
18
2.4. Welfare impact
Using equations 2.19, 2.20, and 2.16 in the equation for Q (2.12), the growth rate
in utility is derived as follows:9:
Q k4m (2.26)
where
k4 (a + Q)(1 +2) ( 02a- )
a,,tn3fl is always positive. Using the familiar budget shares equations for a
CES equation and initializing lprices to one, it can be shown that O Q ( ) (P..)M e
(Q) e Likewise, OQ = (i) so that welfare increases if
2 <2) (D)(
(1)" (E) D'
9Q,& Re may be interpretedi as a negative equivalent variation -EV as a ratio to GNP,
since EV = Po(Qo - Q), Po = 1 and Qo is base-year GNP.
19
The intuition behind 2.27 is simple. If the curvature1o of the isoquant is suf-
ficiently 'flat', a condition that is easily attainable if the armington function is
elastic (a > 1), and if M > E (for example, when the current account is bal-
anced), k4 will be negative and a tariff cut will lead to a welfare gain.11
Using the parameter values from the previous cases, we show that the welfare
gain increases with the elasticities in Figure 2.4.
3. Empirical estimates of elasticities
3.1. Econometric issues
As the previous section indicates, to be able to determine the direction and quan-
tify the size of the fiscal impact of trade reform, we need estimates of the foreign
trade elasticities . Although there is large literature on trade elasticities, the es-
timation of trade elasticities generally applies to import demand. Exports from
developing countries are modeled as import demand from importing industrial
°0More precisely, the curvature of the CES function is
aM _( -_6)_
AD 6 (V
"1For any given set of elasticities, it is not clear whether Q >,e > C-2 > Qcase. In case
2, Q is initially less than optimal because of the tax tg so that increases in Q from a tariff cut
might be higher; but this may be offset by a smaller income effect because of tax diversification.
In case 3, a taxed D implies that it is underproduced. Shifting away from it towards the untaxed
exports may not enhance welfare as much in a second-best sense. But equation 2.26 indicates
that k4 may or may not be higher. Whatever the case, it is safe to say that Q will at least be
higher for plausible values of the parameters.
20
0.06<
A ) l / ~~~~~~~~~~~10
Figure 2.4: Welfare impact of tariff reform
countries. Furthermore, in estimating import demand, while the imperfect sub-
stitution model of Armington J1969) is the most prevalent specification, estimates
of elasticities are usually in thLe form of demand price elasticities, not directly in
terms of the substitution and transformation elasticities that appear in our model.
A key issue in the empirical investigations is whether changes in the real
exchange rate have a significant impact on the balance of trade. The litera-
ture may be divided along how they answer the question. Most of the earlier
literature, such as Branson (1.972) and Khan (1974),12 as well as others like Rit-
tenberg (1986), and Bond(1987), and Marquez and McNeilly (1988) found that
12A survey can be found in Goldstein and Khan (1985).
21
trade flows respond significantly to changes in relative prices. However, they
are today criticized for inference problems associated with time-series variables
that have unit roots. Some recent empirical work that took into account the
time-series properties of trade flows and prices, such as Rose (1990 and 1991)
and Ostry and Rose (1992), found little evidence that relative prices matter in
trade flows. The lack of theory in time-series techniques can of course create
interpretation problems. Marquez (1994), for example, stressed the importance
of optimizing behavior and simultaneity in determining the expenditures on do-
mestic and foreign goods. For developing countries, Faini, Pritchett, and Clavijo
(1988) discussed the importance of trade policy and restrictions, which are likely
to understate the structural demand elasticities. One study by Reinhart (1995)
uses time-series techniques and dynamic optimizing behavior; it finds significant
trade relationships but that the aggregate price elasticities tend to be lower than
unity.
There are differences in findings at the disaggregated levels as well. Brenton
and Winters (1992) avoid assuming separability between home and foreign goods
and find low import price elasticities. Panagariya, Shah, and Mishra (1996), on
the other hand, employing better data such as explicit competitors' prices (not
proxies) find high elasticities. In any case, these elasticities apply to specific
groups of commodities, i.e., not at the level of aggregation desired in our model.
22
Another issue is the assumpl,ion of homotheticity in the Armington function,
which is violated by the time trends observed in trade shares. Import and export
shares in GDP for many countries appear to be increasing and independent of the
relative price movements. Alstcn et al. (1990), for example, note that while the
implicit assumption of homotheticity in the CES and CET formulations is theo-
retically appealing, it is also highly restrictive in CGE modeling. The standard
correction is usually to employ a scale variable, such as an income term, to denote
aggregate income activity. Alternative formulations like the almost ideal demand
system (AIDS) or one of the flexible functional forms are often suggested.13 Using
AIDS, Hanson, Robinson, and 'rokarick (1993) find the sectoral expenditure elas-
ticities in United States are generally greater than one. Other AIDS estimations
are found in Alston and Green (1990) and Shiells, Roland-Holst, and Reinert
(1993).
While it is certainly plausible that the capacity to import among countries
rises with income, Petri (1984) and Ho and Jorgenson (1997) believe that the
high income elasticities estimated are probably spurious. In fact, trade shares
seem to be increasing over time for rich and poor countries alike, as would be
the case with increasing globalization. A natural breakpoint is the 1970s when
13Another possibility is to use the CES version suggested by Brown and de Cani (1963), which
permits a variable degree of homogeneity while retaining a constant elasticity of substitution.
23
wide-ranging changes in the international monetary and trading system were im-
plemented. Even for large industrial countries like the United States, there is a
sharp acceleration in the import share in the 1970s. For developing and transi-
tional economies, periods of rapid economic and trade liberalization (particularly
in the late 1980s) are crucial factors. Compared to the earlier periods of inward-
orientation, changes in trade policy in the latter periods often lead to structural
breaks in the trade shares. To account for the shifts in trade shares, a time trend
or a function like the logistic curve is recommended.
There are very few studies that investigate export supply explicitly. Diewert
and Morrison (1988) employ a production-based approach originally developed in
Kohli (1978) to obtain export supply and import demand. A recent cross-country
estimation of export demand and price elasticities that account for nonstationar-
ity is by Senhadji and Montegro (1998). Faini (1994) is one study that estimates
transformation elasticities from a CET function directly and that takes into ac-
count adjustment lags, factor prices, and the importance of capacity utilization.
He finds that the CET elasticity to be less than one for Morroco but much greater
than one for Turkey. In general, it would be difficult to replicate these studies for
many countries without extensive micro data. Part of the problem is the measure-
ment problems of factor accumulations and their returns. Another issue is the
adjustment lags in supply that may require measurement of capacity utilization.
24
3.2. Estimation methods anad results
In this paper, we employ a variety of methods to estimate our critical parameters,
or and P. Tables 1 and 2 tabulate the Armington and CET elasticities estimated
using these various methods. No single method provides uniformly good estimates
for all countries in the sample. In the tables, we provide only those estimates that
have positive (or correct) sign s and significant coefficients. Between the two elas-
ticities, CET elasticities tended to be estimated more frequently with the wrong
sign or insignificant coefficients. One problem is that the aggregate price indices
of imports, exports, and domestic good tend to move in the same fashion for
many countries, dominated by underlying inflation trends and nominal exchange
rate depreciation. As a result, the real exchange rates or relative prices of exports
and imports over the domestic good may be indistinguishable from one another
statistically. The quantities of exports and imports also tended to move together
in many countries, especially during periods with balance-of-payment problems;
hence, the two functions may not be fully unidentified in many instances. In ad-
dition, the CET elasticities miay be affected by possible adjustment lags in supply
behavior that are difficult to handle without additional micro data. Nevertheless,
there are sufficiently good estimates for both elasticities in the tables. In the next
subsections, we briefly describe the econometric methods employed.
25
3.2.1. Simple OLS results
Before considering other approaches, we estimate using OLS the two aggregate
trade elasticities from the optimal conditions for import demand and export sup-
ply (equation 2.3 and 2.5). By taking logarithms, the non-linear functions are
transformed into log-linear form, from which the trade elasticities are easily re-
covered:
In(D pan(m (3.1)
In (E) =a + Q ln (pde) (3.2)
where a = ln( In )t) and or= ln ( i4 -)) are two constant terms. In general,
the simple OLS estimation of the CET elasticities is the most problematic with
the largest number of incorrect signs and insignificant coefficients.
3.2.2. Time trend, structural breaks, and scale factor
To account for the changing ratios of foreign over domestic goods, we add a time
trend to the OLS. We also test the hypothesis that there is a structural break or
a non-linear acceleration in the time trend due to policy reform, policy reversal,
or increasing globalization. In general, it will be difficult to decide on a specific
26
break point unless the timing of trade reform is known for specific countries. The
following specification is used to test for possible structural changes
InK(D = +t 7rit+ 72I(k)t + In (p +J v
In (E) = a -t 6t + 62I(k)t + Qln (p) + u
where I(k) is an indicator function which equals I for t > k and otherwise 0.
The break point k is set to d'fferent values, i.e., every five years. This specifi-
cation is also extended to test for structural breaks in the elasticities as well as
combinations of a structural break in the mean and a structural break in the
slope coefficients (trend or elasticities). The logistic trend employed by Ho and
Jorgenson (1998) is another alternative but we believe it is probably better suited
for industrial countries, where there is less chance of reversals of trend directions
due to policy failures and reversals.
For comparison, we also eEtimate the equations employing aggregate income as
a scale variable. We employ the log of domestic GDP in the Armington function
and the log of OECD GDP index in the CET function. The two income variables,
which increase gradually, generally function and serve as time trends. Time trends
27
seem to work best in improving the CET estimates.
3.2.3. Primary products
Given the plausible hypothesis that primary exports are not very responsive to
relative prices in developing countries, the export data are adjusted to eliminate
primary product export. Define PM = real primary product export. Then
E* = E - PM. We replace E with E* where applicable. In general, this seems
to improve the elasticities for a few countries.
3.2.4. Seemingly unrelated regressions
Another method we used is that of seemingly unrelated regressions (SUR). SUR is
designed to improve the efficiency in the variance estimation in cases when there
is a correlation between the two sets of residuals. The parameter estimation may
change, however, but not to a great extent. In our case, the signs most of the
coefficients remain the same. Using subsamples after 1980 on the hypothesis that
foreign trade is more responsive to prices during the widespread liberalization in
eighties seems to lead to more positive CET estimates than using the full samples.
However, the number of observations becomes very small and the estimates should
be taken with great caution.
28
3.2.5. Other factors
We also examine the premise that a country's resource balance in the balance
of payment account or the relat'ive importance of the agriculture sector may af-
fect export and import behavior by adding them as separate variables, with and
without trend. A few of the estimation improve.
3.2.6. Simultaneity
We also tried a number of approaches that did not give good results. Among them
was simultaneous estimation of the export function and the import function using
instrumental variables methods. We also tried using a reduced form equation for
Pd from which the trade elasticities can be derived:
ln(Pd) = c + oe ln(Pm) + lIn(PX) + ±ln(A) + u
where a = , = , M/3 and 7 = 1. However, the coefficients are over-
identified because we have three equations for two unknowns. Note that if we
consider a + p 1 we can fuither write the above regression as
In ( =In ( + ln() + u.
29
Based on the and estimated from the restricted regression, the elasticities Q =
p -1 and C = + 1 can be uniquely determined. The results were not promising
however.
3.2.7. Cointegration
We also tried unit root test and cointegration regressions. We tried different
model specifications, including different lags, different orders of time polynomial,
etc. The general conclusion is that the unit root null cannot be rejected for most
of the variables (each country has four time series, i.e., In (E), In ( I), ln (D)
and ln (PEM,)). It should be noted however that proper cointegration analysis will
require a deeper data analysis that is only possible with thorough examination
of individual countries. Moreover, the absence of long time-series may increase
the probability of spurious cointegration. On the other hand, because we are
using annual data, longer time-series runs into the problem of structural change
or breaks that are harder to handle in this methodology.14 Keeping in mind the
caveats, the cointegration results are also presented.
For the cointegration results of regressions 3.1 and 3.2, we tried the Johansen
vector error-correction model (VECM) model (Johansen, 1988, 1991), the Phillips
and Hansen fully-modified (FM) OLS model (Phillips and Hansen, 1990), and the
4See, for example, Gonzalo and Lee (1998), for a discussion of some of the pitfalls.
30
Park canonical cointegrating regressions(CCR) model (Park, 1992). However, not
all results are consistent or improve with cointegration. Only the Johansen VECM
estimation results are reported.
4. Conclusions
In this paper, we present the simplest structure of an open economy that provides
a quick but clear method of quantifying the fiscal consequences of trade reform.
The model can be solved analytically and we provide intuitive formulae for un-
derstanding the fiscal effects of tariff changes. We find in general that it matters
what the values of the elasticites, a and Q, are relative to one another. Even if
just one of the elasticities is low (close to zero), revenue will decline unequivocally
from tariff reform, reaching close to the maximum drop regardless whether the
other elasticity is high. This is because for imports to grow and tariff collection
to compensate for the tax cut, the import elasticity a has to be high. Because
of the balance of trade constraint however, imports cannot substitute for domes-
tic goods unless supply is able to switch towards exports. Hence, the export
transformation elasticity Q has to be high as well. In the example given, both a
and Q have to be greater than 20 before revenue growth becomes really positive.
Hence as substitution possibilities between foreign and domestic goods increase,
a tariff reform can theoretically be self-financing. Conversely, if the elasticities
31
are less than 'large', tax revenue will fall with tariff reduction and further fiscal
adjustments are necessary.
The precise value of a or Q is an empirical issue and we provide empirical
estimates of the possible range for about 60 countries using various approaches,
including the Johansen method. These estimates can of course be refined with
better data (e.g. export price indices) and better knowledge of the breakpoints
and episodes of policy reforms and crisis. However, they do indicate that the
elasticites only range from 0 to 3 in most cases, nowhere near the point at which
tariff reform can be self-financing.
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38
5. Appendices
We compile time-series data of trade for selected countries from various sources:
the World Bank's Economic and Social Database, the IMF's International Finan-
cial Statistics (IFS), as well as trade taxes from the IMF's Governmuent Finance
Statistics (GFS). Each variable in the model may be calibrated using different
data sources and definitions. AiFter considering various alternatives, we settle on
the most widely available nationaal and fiscal accounts, which give us the longest
time-series:15
* X = total output of goocds and services or GDP at factor cost in constant
local currency (base year 1987)
- E = exports of goods and services in constant local currency from the
national accounts (base year 1987)
* M = imports of goods and services in constant local currency from the
national accounts (base year 1987)
* tm = import duty defined as the ratio of tariff revenue to imports
* te = export duty (-export subsidy) defined as the ratio of export duty to
exports
15Table 1 in the appendix summaries the list of variables we have tried and their alternative
sources.
39
* P = price index of aggregate output or GDP at factor cost
* PE = price index of exports (fob) from national accounts in local currency
plus export duty rate
* PM = price index of imports (cif) from national accounts in local currency
plus import tariff rate
* D=X-E.
* Pd = PXX-P,PE
* Q = D + M, total supply of goods and services, which should be equal to
C + I + G, i.e., aggregate domestic demand in constant local currency in
the national accounts
p _ P,D+PE
Note the exchange rate is not incorporated into the formula if all variables
are based on the local currency.'6 Due to missing observations, we consider only
16For some countries such as Hong Kong and Singapore the domestic good price is not easy to
define. Because of significant re-exports, the value of trade is greater than GDP (or aggregate
output). Instead we can define Q = composite goods and Pq = price of composite goods such
that pq = P-X - (PE - PM)
Q
Q = X-(E-M).
40
countries which long time series in In (D) In (-d), In (M) and In (pm) required
for our estimation. Over long period of time, we also noted that the trends of the
price indices dominate the effects of the trade taxes on the relative prices. These
trends are driven by significant long-term inflation in the domestic and world
markets as well as devaluations of foreign exchange rate. In order to maintain a
longer time-series in PM and 2E, we decided to exclude the trade taxes, which
are available only from the mid-seventies at the earliest (from the IMF GFS).
This does not seem to affect the estimates of the elasticities when we tested most
of the countries.
41
Table I Import Elasticities
Elasticity Break MODEL
Country ° t(e) Dummy SUM Year NOB Meftod Order
ANGOLA 0.47 1.42 * 6 clsw/GOP
ARGENTINA 0.79 3.71 10 ols w/o trend
AUSTRIA 1.92 10.53 30 ols wlo trend
1.76 3.06 30 Johansen VECM, NDT 3
BAHAMAS; THE 1.50 1.91 * 8 olsawl GDP
1.44 3.62 8 SURw/trend,from 1980
BANGLADESH 0.57 2.31 22 ols w/o trend
0.55 2.83 22 ols wl trend
0.54 2.98 22 ols wl GDP
0.37 2.18 22 SUR wi GDP, all available years
0.35 1.99 22 SUR w/ trend, all available years
BELGIUM 0.61 1.79 34 ols w/o trend
0.26 6.66 34 ols wl trend
0.26 6.67 70 34 ols wl trend break
0.26 3.09 34 ols wl GDP
0.27 3.27 34 SUR w/ GDP, all available years
0.24 6.41 34 SUR w/ trend, all available years
BELIZE 0.66 2.04 * 15 olsawI GOP
0.81 3.20 ^ 15 SURw/trend,from 1980
BENIN 1.45 10.19 25 ols w/o trend
1.36 4.94 25 ols wl trend
1.41 5.56 25 ols w/ GOP
1.17 5.46 25 SUR w/ GDP, all available years
1.18 4.71 25 SUR w/ trend, all available years
2.50 13.84 25 Johansen VECM, LDT 4
BURUNDI 0.89 2.73 23 ols w/ trend
0.68 1.80 23 ols w/ GDP
0.65 1.74 23 SUR wl GDP, all available years
0.87 2.68 23 SUR w/ trend, all available years
CAMEROON 0.22 2.83 22 ols w/o trend
0.22 2.45 22 ols w/ trend
0.23 2.67 22 ols w/ GDP
0.24 2.83 22 SUR w/ GDP, all available years
0.33 3.21 * 11 SUR w/ GDP, from 1980
0.24 2.59 22 SUR wl trend, all available years
0.52 3.43 * 11 SUR w/ trend, from 1980
CANADA 2.01 8.69 29 ols w/o trend
2.29 4.05 29 Johansen VECM, NDT 5
CHAD 0.75 3.90 * 14 ols wl GDP
0.91 4.67 ^ 14 SUR wl trend, all available years
CHILE 0.43 6.45 35 ols wl trend
0.43 6.31 80 35 ols w/ trend break
0.23 2.58 35 ols w/ GOP
0.25 2.74 35 SUR w/ GDP, all available years
0.51 8.12 35 SUR wl trend, all available years
0.15 1.34 35 Johansen VECM, LOT 3
CHINA 0.06 0.35 * 15 ols wl GDP
0.06 0.47 * x 15 ols WI (X-M)IGDP wI trend
Page 1 of 8
Table I Import Elasticities
Elasticity Break MODEL
Country o t(o) Dummy SUM Year NOB Method Order
0.06 0.60 * x 15 olswl AgrlGDPwlo trend
0.07 0.40 * x 15 SUR w/ GDP, from 1980
COLOMBIA 1.20 5.81 27 ols w/o trend
1.13 5.35 27 olsw/trend
1.14 5.39 27 ols w/ GDP
1.30 6.97 27 SUR w/ GDP, all available years
1.31 6.98 27 SUR w/ trend, all available years
5.18 3.29 27 Johansen VECM, QDT 6
CONGO 0.36 2.11 30 olsw/otrend
0.37 2.12 30 ols wl trend
0.36 3.14 85 30 ols wl trend break
0.38 2.11 30 olsw/GDP
0.36 2.15 30 SUR wl GDP, all available years
0.34 2.08 30 SUR w/ trend, all available years
0.25 1.27 x 30 Johansen VECM, NDT 4
COSTA RICA 0.87 4.65 35 ols w/o trend
0.56 5.42 35 ols w/ trend
0.54 6.04 75 35 ols w/ trend break
0.56 6.19 35 ols wl GDP
0.59 7.35i 35 SUR w/ GDP, all available years
0.62 6.97 35 SUR w/ trend, all available years
CYPRUS 0.82 5.34 20 ols w/o trend
1.08 4.24 20 ols wl (X-M)IGDP w/o trend
DENMARK 0.78 8.03 34 ols w/o trend
0.86 4.15 34 Johansen VECM, NDT 3
DOMINICAN REPUBLIC 0.23 2.58 32 ols w/o trend
0.27 2.80 32 ols wl trend
0.36 4.C5 85 32 ols w/ trend break
0.26 2.62 32 ols wl GDP
0.41 4.80 32 SUR wl GDP, all available years
0.41 4.87 32 SUR wI trend, all available years
ECUADOR 0.27 1.!6 30 Johansen VECM, LDT 7
EGYPT 0.10 0.139 * x 13 ols wlo trend
FINLAND 0.47 2.29 34 ols w/o trend
0.44 2.21 34 ols w/ (X-M)/GDP w/o trend
0.51 1.84 * 14 SUR w/ GDP, from 1980
1.33 2.46 34 Johansen VECM, NDT 3
GHANA 0.22 1.62 34 ols w/ (X-M)/GDP w/o trend
0.34 4,75 34 ols w/ AgrlGOP wlo trend
GREECE 1.46 5.61 34 ols w/o trend,
0.67 10.75 80 34 ols w/ trend break
0.96 9.09 34 ols w/ GDP
1.01 9.78 34 SUR w/ GDP, all available years
0.68 11.20 34 SUR w/ trend, all available years
0.77 12.57 34 Johansen VECM, LOT 5
GRENADA 0.22 01.46 x 9 SUR w/ trend, from 1980
GUATEMALA 0.49 3.66 35 ols wlo trend
0.43 1.24 x 35 ols w/ GOP
Page 2 of 8
Table I Import Elasticities
Elasticity Break MODEL
Country (v t(a) Dummy SUM Year NOB Method Order
5.14 0.93 x 35 Johansen VECM, NDT 7
GUINEA-BISSAU 0.05 0.32 * x 8 ols w/ GDP
0.08 0.46 * x 8 SUR w/ GDP, from 1980
0.06 0.37 * x 8 SUR wI trend, from 1980
HAITI 0.69 3.80 29 ols w/o trend
0.62 9.63 29 ols wI GDP
0.64 10.01 29 SUR w/ GDP, all available years
1.62 2.99 29 Johansen VECM, NDT 4
HONDURAS 0.29 2.24 35 SUR w/ GDP, all available years
0.28 2.05 35 SUR wl trend, all available years
0.43 1.80 35 Johansen VECM, NDT 2
HUNGARY 0.14 1.46 25 ols w/ (X-M)/GDP w/o trend
0.16 1.33 * x 15 SUR w/ GDP, from 1980
0.37 1.70 * 15 SUR w/ trend, from 1980
0.04 0.66 x 25 Johansen VECM, NDT 2
INDIA 0.29 1.45 75 35 ols w/ trend break
0.16 0.97 x 35 SUR w/ GDP, all available years
0.45 2.76 ' 15 SURw/ GDP, from 1980
0.14 0.89 x 35 SUR w/ trend, all available years
0.48 2.84 * 15 SUR w/ trend, from 1980
INDONESIA 1.39 5.94 28 ols w/o trend
1.32 8.91 28 ols w/ trend
1.26 8.90 28 ols w/ GDP
1.02 8.88 28 SUR w/ GDP, all available years
1.11 8.53 28 SUR w/ trend, all available years
1.14 4.76 28 Johansen VECM, NDT 4
IRAN; ISLAMIC REPUBLIC OF 0.06 0.71 x 19 SUR wl trend, all available years
IRELAND 1.68 7.63 34 ols w/o trend
0.36 4.67 34 ols w/ trend
0.37 4.76 80 34 ols w/ trend break
0.43 5.16 -0.17 0.26 80 34 olsw/ elasticity dummy
0.43 5.31 34 ols w/ GDP
0.52 6.84 34 SUR wl GOP, all available years
0.38 5.02 34 SUR w/ trend, all available years
2.95 6.31 34 Johansen VECM, LDT 7
0.44 6.08 34 Johansen VECM, QDT 1
ISRAEL 0.36 5.02 27 ols w/o trend
0.35 4.81 27 ols w/ trend
0.33 4.32 27 ols w/ GDP
0.34 4.59 27 SUR w/ GDP, all available years
0.35 4.84 27 SUR w/ trend, all available years
0.32 6.21 27 Johansen VECM, LDT 2
JAMAICA 0.24 1.69 70 34 ols w/ trend break
0.37 1.69 * 14 SUR w/ GDP, from 1980
0.24 1.96 34 SUR wl trend, all available years
0.29 2.08 * 14 SUR wi trend, from 1980
1.80 2.44 34 Johansen VECM, QDT 1
JAPAN 0.14 1.42 0.47 0.61 75 33 ols w/ elasticity dummy
Page 3of8
Table I Import Elasticities
Elasticity Break MODEL
Country c t(a) Dummy SUM Year NOB Method Order
0.91 4.81 33 Johansen VECM, LDT I
KENYA 0.88 6.66 31 ols w/ trend
0.94 7.40 80 31 ols w/ trend break
0.93 5.21 -0.04 0.89 70 31 ols wl elasticity dummy
0.75 4.04 31 ols w/ GDP
0.90 5.63 31 SUR wl GDP, all available years
0.79 6.72 31 SUR wl trend, all available years
0.66 2.94 31 Johansen VECM, NDT 2
KOREA; REPUBLIC OF 0.06 0.29 x 35 SUR wI trend, all available years
0.88 4.30 * 15 SURw/ trend, from 1980
KUWAIT 1.44 5.48 * 19 olsw/trend
1.31 6.91 * 19 olsw/GDP
1.20 6.48 * 19 SUR w/ GDP, all available years
1.42 5.81 * 19 SUR w/ trend, all available years
LAO PEOPLE'S DEMOCRATIC REPUB 0.84 5.76 * 10 SUR w/ trend, from 1980
LESOTHO 0.55 2.48 * 15 ols w/ GDP
0.48 1.75 * 15 SUR wI trend, from 1980
MADAGASCAR 1.08 11.60 34 ols w/o trend
1.18 6.91 34 ols w/ GOP
0.97 7.51 34 SUR w/ GDP, all available years
1.30 13.1, 34 Johansen VECM, NDT 3
MALAWI 0.84 8.52 31 ols w/o trend
0.55 3.37 31 ols w/ trend
0.75 5.27 80 31 ols w/ trend break
0.66 3.55 31 ols w/ GDP
0.66 3.78 31 SUR wl GDP, all available years
0.54 3.46 31 SUR wI trend, all available years
0.83 4.64 31 Johansen VECM, NDT 6
MALAYSIA 2.14 1.88 25 ols wlo trend
1.66 3.30 25 ols w/ trend
1.78 3.'4 25 ols w/ GDP
0.90 2.74 25 SUR w/ GDP, all available years
1.11 3.20 25 SUR w/ trend, all available years
2.37 4.36 25 Johansen VECM, LDT 2
MALDIVES 1.38 0.55 * x 6 SUR w/ trend, from 1980
MALI 1.06 6.61 25 ols w/o trend
0.79 3.87 25 ols w/ GDP
0.70 3 49 25 SUR w/ GOP, all available years
1.25 11.40 25 Johansen VECM, NDT 3
MALTA 2.86 1.43 33 Johansen VECM, LDT 5
MAURITIUS 0.69 3.92 34 ols w/ trend
0.72 4.03 80 34 ols w/ trend break
0.67 4.09 34 ols w/ GDP
0.53 3.68 34 SUR w/ GDP, all available years
0.61 3.93 34 SUR w/ trend, all available years
2.29 3.60 34 Johansen VECM, LDT 6
MEXICO 1.04 4.64 35 ols w/o trend
0.97 13.51 35 ols w/ trend
Page 4 of 8
Table I Import Elasticities
Elasticity Break MODEL
Country a t(a) Dummy SUM Year NOB Method Order
1.07 9.61 85 35 ols wI trend break
1.30 9.59. -0.70 0.60 85 35 ols wI elasticity dummy
0.97 5.40 35 ols w/ GDP
1.17 8.01 35 SUR w/ GDP, all available years
1.16 8.95 35 SUR wl trend, all available years
MOROCCO 0.26 1.72 30 ols wlo trend
0.46 2.54 30 ols w/ trend
0.63 3.89 75 30 ols wI trend break
0.46 2.47 30 ols wl GDP
0.45 2.44 30 SUR w/ GDP, all available years
0.44 2.42 30 SUR w/ trend, all available years
MYANMAR 0.26 1.69 28 olsaw (X-M)/GDP wlo trend
0.48 5.51 28 ols w/ (X-M)IGDP w/ trend
0.83 3.64 15 SUR wl trend, from 1980
0.17 2.09 28 Johansen VECM, NDT 5
NAMIBIA 0.81 1.91 * 10 olsw/GDP
0.64 1.58 t 10 SURRwltrend,from 1980
NETHERLANDS 1.06 8.11 32 ols wlo trend
2.93 1.65 32 Johansen VECM, NDT 1
NIGERIA 0.63 6.59 22 ols w/ trend
0.77 8.04 22 ols w/ GDP
0.76 8.00 22 SUR w/ GDP, all available years
0.64 6.84 22 SUR wl trend, all available years
NORWAY 0.49 5.76 34 ols w/o trend
0.36 2.36 34 ols w/ trend
0.67 4.82 85 34 ols w/ trend break
0.40 4.13 0.80 1.19 70 34 ols wl elasticrty dummy
0.33 2.47 34 ols w/ GDP
0.31 2.35 34 SUR wI GDP, all available years
0.32 2.12 34 SUR wI trend, all available years
0.63 5.67 34 Johansen VECM, NDT 3
PAKISTAN OA7 13.69 35 ols w/o trend
0.49 6.15 35 ols w/ trend
0.61 7.95 70 35 ols w/ trend break
0.43 6.16 35 olsw/GDP
0.43 6.22 35 SUR w/ GDP, all available years
0.92 4.72 15 SUR wl GDP, from 1980
0.49 6.14 35 SUR w/ trend, all available years
0.93 4.85 * 15 SUR w/ trend, from 1980
0.46 15.03 35 Johansen VECM, NDT 1
PANAMA 2.63 1.70 * 7 ols wl GDP
PAPUA NEW GUINEA 0.28 1.92 21 ols w/o trend
0.34 2.47 21 ols w/ trend
0.31 2.10 21 als w/ GOP
0.31 2.10 21 SUR wl GDP, all available years
0.34 2.47 21 SUR w/ trend, all available years
PARAGUAY 1.37 3.50 35 ols w/o trend
0.62 2.03 85 35 ols w/ trend break
Page 5 of 8
Table I Import Elasticities
Elasticity Break MODEL
Country a t(a) Dummy SUM Year NOB Method Order
0.93 4.50 35 SUR w/ GDP, all available years
0.76 3.81 35 SUR wl trend, all available years
3.19 4.19 35 Johansen VECM, NDT 3
PHILIPPINES 0.73 6.31 35 ols w/ trend
0.73 6.37 75 35 ols wI trend break
0.99 6.37 35 ols w/ GDP
1.08 7.97 35 SUR w/ GDP, all available years
0.97 3.03 ^ 15 SUR w/ GDP, from 1980
0.75 6.85 35 SUR w/ trend, all available years
1.51 2.40 * 15 SUR wI trend, from 1980
PORTUGAL 0.63 4.73 27 ols w/o trend
0.61 7.63 27 ols w/ trend
0.65 7.63 27 ols w/ GDP
0.67 4.47' 27 ols wl (X-M)/GDP wto trend
0.59 6.40 27 ols wl (X-M)/GDP wl trend
0.67 8.75 27 SUR w/ GDP, all available years
0.63 8.38 27 SUR wI trend, all available years
0.41 3.03 * 13 SUR wltrend, from 1980
0.49 3.93 27 Johansen VECM, LDT 3
RWANDA 0.17 1.413 33 ols w/ GDP
0.16 1.44 33 SUR w/ GDP, all available years
0.40 3.95 * 13 SUR wlGDP, from 1980
0.40 4.09 * 13 SURw/trend, from 1980
0.46 4.91 33 Johansen VECM, LDT 4
SALVADOR, EL 0.40 1.06 x 35 Johansen VECM, NDT 6
SENEGAL 0.27 1.34 * 14 ols w/ GDP
0.27 1.24 * x 14 SUR wI trend, all available years
SEYCHELLES 0.68 2.C9 * 7 olsw/GDP
0.85 2.27 * 7 SUR w/ trend, from 1980
SIERRA LEONE 1.10 7.53 24 ols w/o trend
0.50 2.49 24 ols w/ trend
0.99 5.94 24 ols wI GDP
1.11 6.93 24 SUR w/ GDP, all available years
0.64 3.!54 24 SUR wI trend, all available years
SOMALIA 0.82 4.47 * 8 SUR wl trend, all available years
0.82 4.47 * 8 SUR w/ trend, from 1980
SOUTH KOREA 1.64 9.20 35 ols w/o trend
1.29 5.130 35 ols wi (X-M)/GDP wlo trend
SRI LANKA 0.90 4.92 32 ots w/o trend
0.76 4.15 32 ols w/ trend
1.02 6.92 75 32 ols wI trend break
0.75 3.96 0.93 1.68 70 32 ols w/ elasticity dummy
0.66 3.55 32 ols w/ GDP
0.58 3.79 32 SUR wI GDP, all available years
0.62 4 32 32 SUR w/ trend, all available years
3.27 6 58 32 Johansen VECM, LDT 3
ST. KITTS AND NEVIS 2.80 1.59 * 6 ols wI GDP
2.67 1.41 * 6 SUR w/ trend, from 1980
Page 6 of 8
Table I Import Elasticities
Elasticity Break MODEL
Country a t(o) Dummy SUM Year NOB Method Order
ST. VINCENT AND THE GRENADINES 1.09 2.30 t 11 ols w/ GDP
0.47 1.38 * 11 SUR w/ trend, all available years
SWAZILAND 0.38 3.23 * 18 olsw/trend
0.38 3.36 * 18 olsw/GDP
0.40 3.57 18 SUR w/ GDP, all available years
0.35 3.02 t 15 SUR w/ GDP, from 1980
0.41 3.58 18 SUR w/ trend, all available years
SWEDEN 0.41 1.62 34 ols wlo trend
0.17 2.68 70 34 ols w/ trend break
0.14 2.62 34 ols w/ GDP
0.15 2.96 34 SUR w/ GDP, all available years
0.14 2.13 34 SURw/trend, all available years
1.17 0.67 x 34 Johansen VECM, NDT 2
SWITZERLAND 1.38 17.92 34 ols w/o trend
1.58 19.85 34 ols w/ (X-M)/GDP w/o trend
1.61 10.33 34 Johansen VECM, NDT 1
SYRIAN ARAB REPUBLIC 0.12 1.35 17 ols w/ trend
0.09 1.21 * x 17 ols w/GDP
0.11 1.37 * 17 SUR w/ GDP, all available years
0.13 1.54 17 SUR w/ trend, all available years
TAIWAN 1.41 3.50 32 ols w/o trend
0.18 1.86 1.24 1.41 70 32 ols w/ elasticity dummy
THAILAND 0.97 4.82 35 ols w/ trend
0.93 5.05 85 35 ols wl trend break
0.89 4.88 35 ols w/ GDP
1.13 9.09 35 SUR w/ GDP, all available years
1.07 7.41 35 SUR w/ trend, all available years
TOGO 0.97 3.45 * 18 ols w/o trend
0.47 1.60 * 18 olsw/trend
0.46 1.93 t 18 SUR w/ GDP, all available years
0.63 2.50 * 8 SUR w/ GDP, from 1980
0.58 2.22 ' 18 SUR w/ trend, all available years
0.77 2.86 * 8 SUR wI trend, from 1980
TRINIDAD AND TOBAGO 0.81 28.34 28 ols w/o trend
0.62 7.82 28 ols w/ trend
0.78 24.41 28 ols w/ GDP
0.76 24.34 28 SUR w/ GDP, all available years
0.61 8.35 28 SUR w/ trend, all available years
1.01 10.39 28 Johansen VECM, NDT 2
TUNISIA 3.14 3.61 27 Johansen VECM, NDT 6
TURKEY 0.33 1.46 * 8 SURw/trend,from 1980
UNITED ARAB EMIRATES 0.76 4.32 * 15 SUR w/ trend, all available years
0.71 2.32 10 SURw/trend, from 1980
UNITED STATES 0.71 2.02 34 ols w/ GDP
0.54 1.57 34 SUR wl GDP, all available years
2.61 7.72 14 SUR w/ GDP, from 1980
2.40 0.82 x 34 Johansen VECM, NDT 4
1.47 0.77 x 34 Johansen VECM, NDT 5
Page 7 of 8
Table 1 Import Elasticities
Elasticity Break MODEL
Country a t(a) Dummy SUM Year NOB Method Order
VENEZUELA 0.32 1.12 rx 15 SURwl GDP, from 1980
YUGOSLAVIA 0.64 9.31 21 ols w/o trend
0.45 4.95 21 ols w/ trend
0.53 7.14 21 olsw/GDP
0.55 7.41 21 SUR wJ GDP, all available years
0.44 4.89 21 SUR wl trend, all available years
ZIMBABWE 0.49 2.87 * 15 ols wlo trend
0.51 2.71 15 olsw/trend
0.51 2.75 15 olsw/GDP
0.51 2.72 * 15 SUR w/ trend, all available years
Notes:
o = Armington elasticity
t(a) = t statistic
Model: Model Specification
NOB = Number of observations
NDT - No deterministic trend in the data, VECM
LDT - Linear deterministic trend in the data, VECM
QDT - Quadratic deterministic trend in the data, VECM
Order: Number of lags of the VECM model.VECM
SUM - The sum of elasticity and dummy
* = Less than 20 observations
x = lnsignifcant at 90% confidence level
Page 8 of 8
Table 2 Export Elasticities, Selected Estimates
Break Model
Country Q2 t(Q) Dummy SUM Year NOB Method Order
ARGENTINA 0.31 1.43 ' 10 ols wl trend
0.37 2.20 * 10 ols w/ GDP
0.39 1.81 * 10 SUR w/ trend, from 1980
AUSTRIA 0.78 4.87 30 ols w/ trend
0.94 6.30 75 30 olswl trend break
0.98 5.27 0.15 1.13 75 30 ols w/ elasticity dummy
0.71 4.55 30 SUR w/ trend, all available years
0.47 4.42 30 Johansen VECM, LDT 4
BANGLADESH 0.60 1.94 22 ols w/o trend
0.72 2.55 22 ols w/ (X-M)/GDP w/o trend
0.32 1.58 20 ols excl. Agr exports w/o trend
BELGIUM 0.39 0.13 x 34 JohansenVECM, NDT w/Agr/GDP I
BOLIVIA 0.35 3.04 13 ols w/o trend
CAMEROON 0.26 1.13 * x 11 SURw/GDP, from 1980
CANADA 1.57 1.19 x 29 JohansenVECM, NDT 5
CHAD 0.12 0.23' x 6 SURw/trend, from 1980
CHILE 0.05 0.54 x 15 SUR w/ trend, from 1980
CHINA 0.23 4.36 ' 15 ols w/o trend
0.21 4.77 * 15 ols wi (X-M)/GDP wlo trend
0.15 1.81 * 15 olsw/ Agr/GDPw/o trend
COLOMBIA 0.32 2.01 * 15 SURw/GDP,from 1980
0.52 3.47 15 SUR w/ trend, from 1980
CONGO 0.95 1.87 30 Johansen VECM, NDT w/ Agr/GDP 5
COSTA RICA 0.70 1.55 35 Johansen VECM, NDT w/ Agr/GDP I
CYPRUS 0.93 1.26 x 20 ols w/ Agr/GDP w/ trend
DENMARK 0.03 0.31 x 34 ols w/ trend
0.02 0.32 x 34 ols wI (X-M)lGDP w/ trend
0.03 0.29 x 34 SUR wi trend, all available years
DOMINICAN REPUBLIC 2.73 3.95 32 Johansen VECM, NDT 3
ECUADOR 12.69 3.09 30 Johansen VECM, NDT I
EGYPT 0.11 1.72' 13 ols w/o trend
0.10 1.69 ' 13 ols w/ GDP
0.09 1.43 ^ 13 SURw/trend, all available years
FINLAND 0.47 2.72 34 ols w/ trend
0.61 3.36 75 34 ols w/ trend break
0.32 1.90 34 ols w/ GDP
0.25 1.53 34 SUR w/ GDP, all available years
2.05 3.82 * 14 SUR w/ GDP, from 1980
0.43 2.51 34 SUR w/ trend, all available years
1.96 6.06 * 14 SURw/trend, from 1980
0.11 0.78 x 34 Johansen VECM, LDT 4
GHANA 0.10 1.96 34 ols w/ trend
0.11 2.02 80 34 ols w/ trend break
0.09 1.72 34 SUR w/ trend, all available years
0.42 4.78 34 Johansen VECM, QODT 4
GREECE 0.78 12.63 34 Johansen VECM, QODT 5
GUATEMALA 0.33 1.90 85 35 ols w/ trend break
1.70 5.25 35 Johansen VECM, LDT 2
Page 1 of 4
Table 2 Export Elasticities, Selected Estimaltes
Break Model
Country a t(n) Dunmmy SUM Year NOB Method Order
HAITI 0.43 3.48 29 ols w/ trend
0.40 3.88 29 ols w/ GDP
0.37 3.62 29 SUR w/ GDP, all available years
0.32 2.74 29 SUR w/ trend, all available years
0.30 3.57 29 Johansen VECM, LOT 5
0.30 3.55 29 Johansen VECM, QDT 5
HONDURAS 0.19 1.14 x 35 JohansenVECM, LDT 4
HUNGARY 0.56 2.59 25 ols wl (X-M)IGDP wI trend
INDIA 0.44 5.14 35 ols w/o trend
0.41 2.32 70 35 ols w/ trend break
0.45 2.66 35 ols wI GDP
0.43 2.58 35 SUR w/ GDP, all available years
1.02 1.94 * 15 SURwiGDP,from1980
0.33 1.80 35 SUR w/ trend, all available years
0.23 4.81 35 Johansen VECM, NDT 6
INDONESIA 0.75 1.62 28 Johansen VECM, NDT w/ Agr/GDP 2
IRAN 0.14 2.03 * 19 olsw/o trend
0.33 1.70 * 19 ols excl. Agr expors w/o trend
IRELAND 1.01 2.17 28 ols excl. Agr exports w/o trend
ISRAEL 0.66 2.55* 15 SUR w/ GDP, from 1980
JAMAICA 0.45 3.61 34 ols w/o trend
0.22 1A6 34 olswl trend
0.30 1.94 75 34 ols w/ trend break
0.29 1.96 34 ols w/ GDP
0.38 2.38 28 ols exd. Agr exports wlo trend
1.55 3.38 34 Johansen VECM, NDT 4
1.47 3.46 34 Johansen VECM, LDT 4
JAPAN 0.56 1.92 33 ols w/ trend
1.06 4.20 80 33 ols w/ trend break
0.90 5.87 33 ols w/ GDP
0.93 4.22 28 ols exd. Agr exports w/ trend
1.04 7.11 33 SURw/GOP, all available years
0.52 1.84 33 SUR w/ trend, all available years
3.46 2.05 33 Johansen VECM, NDT 3
2.01 1.33 33 Johansen VECM, NDT 2
JORDAN 6.10 2.67 * 10 ols w/ GDP
7.25 2.38 ' 10 SUR wI trend, all available years
7.25 2.38 * 10 SUR w/ trend, from 1980
KOREA; REPUBLIC OF 0.94 3.64 35 ols w/ GDP
1.17 2.81 35 SUR w/ trend, all available years
KUWAIT 0.45 1.02 * x 9 SUR wl GDP, from 1980
MALAYSIA 0.53 1.47 22 ols excl. Agr exports w/o trend
2.43 1.68 25 Johansen VECM, NDT 3
3.24 3.27 25 Johansen VECM, NOT 5
MALI 3.78 0.77 25 Johansen VECM, NDT 3
MALTA 1.71 1.17 33 Johansen VECM, NDT 2
MAURITIUS 0.14 0.35 * 14 SUR w/trend, from 1980
MEXICO 0.42 2.95 85 35 ols wl trend break
Page 2 of 4
Table 2 Export Elasticities, Selected Estimates
Break Model
Country Q t(Q) Dummy SUM Year NOB Method Order
0.37 2.09 35 ols w/ Agr/GDP wl trend
0.47 2.31 28 ols excl. Agr exports w/o trend
0.22 1.18 35 SUR w/ GDP, all available years
0.72 4.80 * 15 SUR w/ GDP, from 1980
0.76 6.13 t 15 SUR w/trend, from 1980
2.54 1.49 35 Johansen VECM, LDT 4
MOROCCO 0.89 3.76 30 Johansen VECM, NDT w/ Agr/GDP 4
MYANMAR 0.24 0.44 x 28 Johansen VECM, NDT w/ Agr/GDP 4
NETHERLANDS 0.09 1.81 ' 12 SURw/GDP, from 1980
NORWAY 0.27 0.49 x 34 Johansen VECM, NDT wI Agr/GDP 2
PAKISTAN 1.50 1.43 35 Johansen VECM, NDT 6
PAPUA NEW GUINEA 0.02 0.14 * x 21 ols wl AgrlGDP wl trend
PARAGUAY 1.67 0.97 x 35 Johansen VECM, NDT w/ Agr/GDP 6
PHILIPPINES 0.23 2.57 35 Johansen VECM, NDT w/ Agr/GDP 6
PORTUGAL 0.23 2.24 t 13 SUR w/ GDP, from 1980
0.20 1.69 t 13 SURwltrend,from 1980
SALVADOR, EL 0.19 1.88 35 ols w/o trend
0.23 10.27 35 Johansen VECM, LDT 6
SENEGAL 0.35 1.63 * 14 ols w/ (X-M)lGDP w/o trend
SOUTH KOREA 1.30 2.36 35 ols w/ trend
1.42 3.36 80 35 ols wl trend break
0.54 2.32 35 SUR w/ GDP, all available years
SWEDEN 0.39 5.83 75 34 ols w/ trend break
0.44 2.04 t 14 SUR w/ GDP, from 1980
0.62 5.06 * 14 SUR w/ trend, from 1980
0.43 0.21 x 34 Johansen VECM, NDT 1
SWITZERLAND 0.42 1.22 x 80 34 ols w/ trend break
0.61 2.92 * 14 SUR w/trend, from 1980
SYRIAN ARAB REPUBLIC 0.09 1.43 t 17 ols w/o trend
0.09 1.35 ' 17 ols wl (X-M)/GDP w/o trend
TAIWAN 0.60 3.25 32 ols w/ trend
0.69 4.36 75 32 ols w/ trend break
0.67 3.35 0.25 0.92 75 32 ols w/ elasticity dummy
0.17 1.65 32 ols w/ GDP
0.14 1.36 32 SUR w/ GDP, all available years
0.67 4.18 32 SUR w/ trend, all available years
THAILAND 2.89 3.00 35 Johansen VECM, LDT w/ Agr/GDP 3
TUNISIA 0.31 1.91 27 ols w/o trend
0.39 2.41 27 olsw/ (X-M)/GDPw/o trend
TURKEY 0.73 2.91 * 8 ols w/ GOP
0.70 2.61 * 8 SUR w/ trend, from 1980
UGANDA 0.08 1.09 t x 12 ols w/o trend
0.06 1.02 t x 12 ols w/GDP
0.06 0.94 * x 12 SURw/GDP,from 1980
0.05 0.74 * x 12 SURw/trend, from 1980
UNITED STATES 0.39 1.77 34 ols w/ trend
0.49 2.28 80 34 ols w/ trend break
0.39 1.78 34 SUR w/ trend, all available years
Page 3 of 4
Table 2 Export Elasticities, Selected Estimates
Break Model
Country L2 t(£) Dummy SUM Year NOB Method Order
2.77 1.94 * 14 SUR w/ trend, from 1980
5.86 2.02 34 Johansen VECM, NDT 6
VENEZUELA 0.15 1.50* 15 SUR w/ GDP, from 1980
0.17 1.68 * 15 SUR wl trend, from 1980
Notes:
a = Armington elasticity
t(o) = t statistic
Model: Model Specification
NOB = Number of observations
NDT - No deterministic trend in the data, VECM
LDT - Linear deterministic trend in the data, VECM
QDT - Quadratic deterministic trend in the data, VECM
Order: Number of lags of the VECM model.VECM
SUM - The sum of elasticity and dummy
* = Less than 20 observations
x = Insignifcant at 90% confidence level
Page 4 of 4
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