You are on page 1of 29

Paper Title: INDIAS EXPORTS TO ASEAN COUNTRIES: AN EMPIRICAL

STUDY

Author: Dr. Amal Sarkar Institutional affiliation: Senior Lecturer, Department of Economics Narasinha Dutt College, Howrah, West Bengal, India.
Mailing Address: Dr. AMAL SARKAR

39, DURGA CHARAN DOCTOR ROAD, KOLKATA, WEST BENGAL, INDIA. PIN CODE: 700 014. Email ID: Telephone Number: amalsarkar@rediffmail.com 033 2216 2371 (INDIA)

INDIAS EXPORTS TO ASEAN COUNTRIES: AN EMPIRICAL STUDY


AMAL SARKAR
ABSTRACT India has put an emphasis on enhancing trade relations with ASEAN countries in recent years. In the post-reform reform period, Indias export to ASEAN has significantly increased. However, the ASEAN financial crisis of late nineties had led a decline in the growth rate of export to this region. From the model, measuring price and import elasticities of export flows to ASEAN attracts a great deal of attention because of its significant implications on India's export earnings from ASEAN. As the time series data involves non-stationary on their level, the Phillips-Hansens Fully Modified (FM) method has been applied to get the estimated values of elasticity. The regression results show that there exist significant differences in elasticity of Indias exports across ASEAN countries.

I.INTRODUCTION Foreign trade plays an important role in the economic development and growth of a country. Findlay (1984) consider trade as a highway of learning and suggest that foreign ideas and creativity are an impetus to domestic creativity and growth. Following the phenomenal economic success of East Asia, it has become an article of faith that an outward oriented industrialization is superior to inward oriented industrialization as a strategy of economic development. A country can reap a lot of benefits from an exportoriented policy (James et.al.1987). Bhagwati (1984) suggests that export-oriented industrialization encourage high taking and seizing opportunities, which are basic requirements for economic development. The India is not exception to the rule. India took trade liberalization measures as an integral part of economic reform in early nineties. These reforms have led to a significant change in the performance of the external sector in the country. As a result of reform, there has been considerable increase in the degree of openness, as measured by the trade to GDP ratio, of the country. The share of trade in GDP has significantly increased from 15 per cent in 1990 to 31 per cent in 2002. Indias exports as a percentage of world exports have improved to 0.77 per cent in 2002. However, Indias share in world trade is still very low and appears unimpressive when compared with other Asian countries such as China, Korea, Malaysia, Thailand, Indonesia, Philippines and Singapore. There is, therefore, a clear need to enhance the volume of Indias trade with the rest of the world. India has put an emphasis on enhancing trade relations with ASEAN countries in recent years.

One of the powerful economic blocs in Asia is ASEAN (Association of South East Asian Nation). ASEAN nations have established AFTA (ASEAN Free Trade Area) in 1992. AFTA had initially aimed at reducing intra-regional tariffs or CEPT (common effective preferential tariff) to 0-5 per cent by 2008. Another economic bloc in Asia is SAARC (South Asian Association for Regional Cooperation). It was established in 1985 comprising seven countries of South Asia. They have formed SAPTA (SAARC Preferential Trade Area) in 1995, and prepared for SAFTA (South Asian Free Trade Area) by 2006. One of the main reasons why countries in Asia get into RTAs (Regional Trade Agreements) is to counter-balance other RTAs and take on international competition. India is the largest country in the SAARC region in terms of size of the economy. It plays a crucial role in the SAARC-ASEAN economic relation. It has signed recently FTA with Singapore and Thailand. Even other ASEAN countries have taken several initiatives to strengthen their trade relations with India. Such initiatives on both ends have led to granting India as a dialogue partner status as well as the formation of a new regional grouping in which India, Myanmar and Thailand are partners, namely BIMSTEC (Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation). One objective of BIMSTEC is to raise the volume of trade among member states through the formation of FTA. India will have to gradually reduce its tariffs and bring it on a par with the ASEAN countries in order to expand Indo-ASEAN trade. With this background, the present paper discusses the nature, pattern and determinants of Indo-ASEAN exports within econometric framework.

The next section outlines the review of past studies. Section III discusses some recent features of Indo-ASEAN trade in three sub-sections while the determinants of trade flows between India and ASEAN countries have been studied in Section IV with three sub-sections. Section V concludes the paper. II. REVIEW OF PAST STUDIES Although the estimated income and price elasticities for bilateral trade are relevant to designing commercial policies and studying international trade linkages, they have received very little attention in the empirical literature (Marquez 1990, Resnick and Truman 1973). The present paper estimate import and price elasticities of export demand for India. There exist some descriptive studies on Indo-ASEAN economic relations ( Asher et.al. 2005, Baru 2001, Kumar et.al.2006). However, to the best of knowledge, no modelling exercise has been done so far for trade flows between India and individual ASEAN countries. From such modelling, measuring price and import elasticities of export flows to ASEAN attracts a great deal of attentions because of its significant implications on India's export earnings from ASEAN. The higher the import elasticity, the more powerful exports will be as an engine of export growth for Indias exports towards ASEAN. The higher the price elasticity, the more competitive will be the ASEAN market for Indias exports. In other words, the devaluation of Indian currency will be more successful for expanding its exports to that region. In our previous study (Sarkar 2004), Indias aggregate export flow to the whole ASEAN region has been specified as a function of aggregate imports of the ASEAN region and Indias export prices. However, the previous study suffers from some serious shortcomings. Firstly, the specification of the bilateral export demand model was very

simple; particularly the role of relative export prices was not dealt. Secondly, the study did not test the statistical property of time series data such as unit root test; which is required for making valid conclusions from the regression results. Thirdly, the quantity variables were measured in nominal term instead of real term. Further, the ASEAN countries were considered as a whole. As countries of ASEAN are at different levels of economic development, the responsiveness of Indias exports with respect to price and activity variables would be different across ASEAN countries. No direct focus was made on modeling trade flows between individual ASEAN country and India. Finally, the concept of bilateral trade elasticity was not incorporated, which seems to be very relevant to designing commercial policies and studying Indias trade linkages with ASEAN countries. The present paper attempts to contribute to these debates by considering India's exports to individual ASEAN countries.

III. SOME FEATURES OF INDO-ASEAN TRADE A. The Current Trend Traditionally a supporter of multilateral trade negotiations, India has finally woken up to the importance of being in an influential trade bloc. The government of India's `Look East' policy is welcome, as the entry of India (one of the fastest growing economies in Asia) into the ASEAN would make the region one of the strongest and most influential, controlling nearly a quarter of the world's trade. Indias participation at the ASEAN Summit was essentially a part of its Look-East policy, which began with a "sectoral dialogue" partnership in 1992. It was subsequently upgraded to a full dialogue partnership in 1995 and membership of the ASEAN Regional Forum in 1996. The first ASEAN Summit with India as a member took place in Cambodia in 2002. The India-

ASEAN FTA, to come into effect in 2011, has the basic objective of enhancing trade relations, but this would entail significant liberalisation by India. The framework FTA has a built in "early harvest programme" which was started from November 1, 2004. In the third India-ASEAN Summit in Laos held in November, 2004, India and ASEAN have set a target to more than double their two-way trade to 30 billion US Dollar by 2007. India's trade and economic interaction with the ten-nation ASEAN has been growing steadily. The bilateral trade between India and the grouping now stands at 13 billion USD. India as one of the fastest growing economies with a long-term partnership agreement with ASEAN countries would provide a new dimension to its relations with the powerful ten-nation grouping. TABLE I WORLD EXPORTS BY REGION/COUNTRY (Billion of Dollars) From World USA EU Asia Japan 1996 5300.7 (100) 794.75 (14.993) 1940.31 (36.604) 979.5 (18.478) 313.53 (5.914) 1997 5525.4 (100) 863.71 (15.631) 1969.32 (35.641) 1020.1 (18.462) 304.12 (5.504) 342.27 (6.194) 165.23 (2.990) 64.02 1998 5396.5 (100) 901.62 (16.707) 2055.84 (38.095) 823.9 (15.267) 250.70 (4.645) 250.35 (4.639) 152.89 (2.833) 60.16 1999 5664.7 (100) 1009.28 (17.817) 2161.83 (38.163) 904.7 (15.970) 275.98 (4.871) 279.63 (4.936) 162.65 (2.871) 67.82 2000 6362.2 (100) 1181.00 (18.562) 2276.74 (35.784) 1113.8 (17.506) 340.28 (5.348) 346.52 (5.446) 212.06 (3.333) 67.60 2001 6134.7 (100) 1103.79 (17.992) 2235.69 (36.443) 1031.2 (16.809) 316.76 (5.163) 309.74 (5.049) 221.45 (3.609) 64.24 2002 6418.6 (100) 1132.86 (17.649) 2328.33 (36.274) 1141.9 (17.790) 305.73 (4.763) 320.49 (4.993) 270.93 (4.221) 71.80

ASEAN+5 336.38 (6.346) China 156.20 (2.946)

SAARC+6 62.04

(1.1740) India 39.20 (0.739)

(1.158) 40.42 (0.731)

(1.114) 38.65 (0.716)

(1.197) 44.93 (0.793)

(1.062) 41.79 (0.656)

(1.047) 40.26 (0.656)

(1.118) 46.32 (0.721)

Source: 1) Direction of Trade Statistics-Yearbook, IMF, 2003. 2) Authors calculation for columns of ASEAN +5 region and SAARC+6 region from Direction of Trade Statistics-Yearbook, IMF, 2003. 3) Figure in parenthesis shows percentage of total world export, which is author's calculation. Note: a) ASEAN+5: Five ASEAN countries considered here, namely Indonesia, Malaysia, Singapore, Philippines and Thailand. b) SAARC+6: South Asian Association for Regional Co-operation comprising six countries out of seven Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka (excluding Bhutan for which data are not available from the same source). If we compare India's trade position vis--vis ASEAN trade position in global scenario, we easily comment that ASEAN position is much stronger than that of India, even SAARC. In Table I we have computed the share of different country/region in overall world exports over the period 1996-2002. ASEAN's share in world exports has ranged from 4 per cent to 6 per cent over the period. On the other hand, India's share in global exports has remained less than 1 per cent in all the years under consideration. It has hovered around 0.7 per cent during this period. Even if we combine the SAARC countries as a whole, the share has remained just over 1 per cent. TABLE II DIRECTION OF INDIA'S EXPORTS TO COUNTRY/REGION (% SHARE) Year/Country EU USA Asia Japan China ASEAN+5 SAARC 1996 21.60 15.77 19.29 5.30 1.382 6.57 4.20 1997 22.38 16.67 19.14 4.76 1.71 5.93 4.04 1998 23.33 18.37 17.09 4.43 1.29 4.31 4.29 1999 20.68 18.02 16.06 3.73 1.13 4.21 3.26 2000 24.33 21.73 21.05 4.22 1.81 5.92 4.29 2001 26.57 23.23 25.96 4.99 3.83 7.44 5.05 2002 24.41 24.43 25.45 4.10 4.46 7.15 4.63 Source: Authors computation from IMF's Direction of Trade Statistics-Yearbook, 2003.

One common feature of India's export pattern is that industrial region provides the major market for India's exports in past. Over the period 1996-2002, the direction of India's exports has been presented in Table II. EU has been found to be largest export market for India in 1996. The share of EU in India's exports has registered uneven trend. However, it's share has increased from 21.6 per cent in 1996 to 24.41 per cent in 2002. United States is the country, which accounts for largest share of India's exports throughout sample period. Between 1996 and 2002, its share in India's exports has significantly increased from 15.77 per cent to 24.43 per cent. It is worthy to note here that Asia has emerged as the largest regional market for India's exports, surpassing EU and USA in 2002. It's share has significantly increased from 19.29 in 1996 to 25.45 in 2002. The share of Japan in India's total export has declined from 5.30 per cent in 1996 to 4.10 per cent in 2002. Another noticeable feature of India's trade in recent years is that Republic of China is emerging as important destination for India's exports. Its share in India's exports has significantly increased from 1.38 per cent in 1996 to 4.46 in 2002. On the other hand, the share of ASEAN region in India's total exports shows an uneven trend. It has decreased from 6.57 per cent in 1996 to 4.21 per cent in 1999, and thereafter, it has increased significantly to 7.15 per cent in 2002. Despite implementation of SAPTA (SAARC Preferential Trade Area) in 1995, the share of SAARC (South Asian Association for Regional Co-operation) countries in India's total export does not show any significant improvement between 1996 and 2002. In Table III, we provide the share of individual ASEAN country in India's total exports to ASEAN region during 1994-2002. From this table, it is clear that Singapore accounts for major share in India's exports to ASEAN throughout the period. However,

India's dependence on Singapore has declined significantly from 43.15 per cent in 1994 to 31.79 per cent in 2002. It has compensated by the increment in the share of other ASEAN countries, particularly Philippines. In the case of Philippines, the share in India's exports to ASEAN region has significantly increased from 5.55 per cent in 1994 to 11.74 per cent in 2002. Therefore, to some extent, India has diversified its destination of exports to ASEAN region over time.

TABLE III SHARE OF ASEAN COUNTRY IN INDIA'S TOTAL EXPORT TO ASEAN (%) Country/Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 Indonesia 14.79 22.30 22.07 19.83 14.68 15.35 15.57 14.73 17.51 Malaysia 14.61 15.80 17.73 20.83 21.82 21.95 22.92 23.40 17.66 Philippines 5.55 5.43 6.75 9.37 8.93 7.22 7.58 7.53 11.74 Singapore 43.15 35.93 36.59 34.54 34.95 33.45 33.33 33.91 31.79 Thailand 21.87 20.52 16.84 15.41 19.60 22.00 20.58 20.40 21.28 ASEAN+5 100 100 100 100 100 100 100 100 100 Source: Authors calculation from International Financial Statistics-Yearbook, IMF. B. ASEAN Financial Crisis and India The collapse of the Thai baht in July 1997 stared the beginning of ASEAN financial currency crisis. Later on, this crisis spread to other ASEAN member countries on regional level. Equity markets and currencies through southeast Asia were under pressure as a result of foreign capital flight, the crisis led the ASEAN economy, which experienced rapid economic growth in last past decades, into deep recession. As the market in the ASEAN region shrinked, the adverse impact of the ASEAN financial crisis did not remain just within the region but even in industrial countries. Because of the importance of the ASEAN economies and the relative dependence of both developing and developed countries on ASEAN market, an economic slowdown in the region

10

resulted in a deceleration in world import demand, with multiplier effects on the exports and incomes of various regions, particularly, developed countries (Shishido and Nakajima 1999). The slowdown in real output growth in developed countries was in turn impact negatively on developing country exports and growth. India as a developing country also felt its impact on its own economy through the shrinkage market in the ASEAN region ( Bhattacharyya 1998). TABLE IV DEPRECIATION IN EXCHANGE RATE OF ASEAN COUNTRY AND INDIA Country Exchanging rate / $ Exchanging rate / $ Percentage change between

as on March, 1998. as on July, 1997 July 1997 March 1998. Indonesia 8325.0 2599.0 - 220.315 Malaysia 3.6430 2.6307 - 38.480 Philippines 37.081 28.968 - 28.006 Singapore 1.6060 1.4713 - 9.155 Thailand 42.920 32.066 - 34.036 India 39.500 35.710 - 10.613 Source: Author's calculation from IMF's International Financial Statistics, May & July, 1998. To study the direct effect of such crisis on India, we compare the changes in exchange rates both for ASEAN countries and India over the period of July 1997 to March 1998 (Table IV). The currency crisis started in July 1997, beginning with Thailand and then difficulty spread to the other countries of ASEAN, especially Malaysia and Indonesia. The currencies of these countries were depreciated significantly. For example, it was over 38 per cent in Malaysia and 24 per cent in Philippines, 34 per cent in Thailand, and by 220 per cent in Indonesia. Singapore was least affected country in the ASEAN region by this crisis. On the other hand, over the same period, the currency of India was depreciated by nearly 10 per cent in India.

11

The indirect effect of ASEAN financial crisis on other regions and countries varied depending on a number of factors, including the pattern of trade and competitiveness (Noland 1998). The adoption of restrictive monetary and fiscal policies in ASEAN countries to deal with the financial crisis, particularly in the most seriously affected countries, had significantly reduced the level of economic activity and domestic demand. As a result of this crisis, the growth rate of GDP sharply declined from 8.5 per cent to -0.1 per cent for Singapore, 4.3 per cent to 2.1 per cent for Indonesia, 7.3 per cent to 7.4 per cent for Malaysia, 5.2 per cent to 0.6 per cent for Philippines and -1.4 per cent to 10.5 per cent for Thailand between 1997 and 1998 (Table V). TABLE V GROWTH RATE OF GDP FOR ASEAN COUNTRIES (Percentage per annum) Economy 1997 1998 1999 2000 2001 2002 Indonesia 4.3 2.1 6.9 7.7 6.3 4.5 Malaysia 7.3 -7.4 6.1 8.3 0.4 4.2 Philippines 5.2 -0.6 3.4 4.4 3.2 4.6 Singapore 8.5 -0.1 6.4 9.4 -2.4 2.2 Thailand -1.4 -10.5 4.4 4.6 1.9 5.2 Source: Asian Development Outlook, ADB, 2003.

A consequent rise in unemployment has also added to the initial expenditure reduction effect. The reduction in aggregate expenditure reduced overall imports, affecting to varying degrees different products and supplying countries. Between 1997 and 1998, the growth rate of merchandise imports sharply declined from 0.7 per cent to 23.3 per cent in case of Singapore, 4.5 per cent to 30.9 per cent in case of Indonesia, 1.2 per cent to -26.6 per cent in case of Malaysia, 14.0 per cent to 18.8 per cent in case of Philippines, and -13.4 per cent to - 33.8 per cent in case of Thailand (Table VI).

12

TABLE VI GROWTH RATE OF MERCHANDISE IMPORTS FOR ASEAN COUNTRIES (Percentage per annum) Economy 1997 1998 1999 2000 2001 2002 Indonesia 4.5 -30.9 -4.2 31.9 -14.1 0.4 Malaysia 1.2 -26.6 13.5 26.3 -10.3 8.1 Philippines 14.0 -18.8 4.2 14.5 - 4.5 4.6 Singapore 0.7 -23.3 9.3 24.1 -15.5 0.1 Thailand -13.4 -33.8 16.9 31.3 -2.8 4.6 Source: Asian Development Outlook, ADB, 2003. To study the indirect effect of ASEAN financial crisis on India's exports, we have computed the exponential growth rate on the basis of semi-loglinear function over sample period 1977-2002 of the following form: Log Xjt = a + b*t ------------------------------(1). Where, Xjt : Indias exports to jth ASEAN country in million US dollars; t: trend variable; and a: intercept term.

To study India's trade performance during ASEAN financial crisis, we have divided the whole sample period into different sub-periods: 1977-87, 1987-97, 1997-99 and 1999-2002. These demarcations of sub-sample periods are based on some a-priory informations. For example, the sub-sample period 1997-99 is based on the fact of ASEAN financial crisis. On the other hand, the sub-sample period 1999-2002 is based on the fact of post-crisis period. The sub-sample period 1987-1997 can be recognised as a period of pre-crisis period. The source of data is IMFs Direction of Trade Statistics, various issues. The method of estimation of equation (1) is either Cochrane-Orcutt or Ordinary Least Square. In the earliest sub-sample period (1977-1987), India's growth of exports to ASEAN countries was significantly lower than that in pre-crisis period (198797) in case all countries except Malaysia (Table VII). It is worthy to note that growth rate

13

of India's exports to ASEAN region was significantly higher even than that to world as a whole in pre-crisis period. On the other hand, the reverse is true for crisis-period (19971999). It is clear from the table that the ASEAN financial crisis had left negative impact

on India's exports to ASEAN region. The rate of growth of exports to ASEAN region declined significantly in the period 1997-1999 relative to earlier periods. It had turned to be negative in all the cases except India's exports to Thailand. On the other hand, in the post-crisis period (1999-2002), the rate of growth of exports had turned to be positive and significantly higher than that in the crisis period (1997-1999). Further, the overall growth rate of exports to world is significantly lower than that to ASEAN region during the same period. This is also true for overall sample period, i.e. 1977-2002.

TABLE VII EXPONENTIAL GROWTH RATE OF INDIA'S EXPORTS TO WORLD/REGION/COUNTRY# (Percentage per annum) Period World ASEAN Indonesia Malaysia Philippines Singapore Thailand 1977-87 5.51 1.48 -19.54 31.57 1.21 8.01 4.87 1987-97 10.23 18.14 27.89 18.39 26.16 15.17 19.24 1997-99 1.84 -11.81 -11.81 -9.19 -24.80 -13.40 5.97 1999-02 10.77 22.04 22.04 12.34 33.14 17.57 17.57 1977-02 8.69 13.85 13.85 11.33 20.61 10.21 15.16 Note:# Regression Equation (1) using data from IMF's International Financial StatisticsYearbook, various issues. Annual exponential growth rate = b*100 C. Indias Exports to ASEAN in Post-Reform Period After the independence, India chooses import substitution policies at a time when the world economy was growing rapidly. The import substituting industrialization strategy did not work for India in the way it was anticipated. One adverse effect of import

14

substitution strategy was the slowing down of exports, which created persistent balance of payment difficulties. The experiences of ASEAN countries have eradicated the export pessimism that engulfed many developing countries in the 1960s and 1970s and generated optimism for a better future for poor countries (Findlay 1984 and Krueger 1980). Many economists believe that there has been a flying geese pattern of industrial development in East Asia, where Japan leading the way followed by East Asia newly industrializing economies (South Korea, Taiwan, Hong Kong and Singapore), and other ASEAN countries and China (Adams and Davis 1991). Since the early 1990s, India has put emphasis on trade promotion strategy (Mehta 1997). Besides lowering import tariff, one major area of trade policy reform has been the adoption of managed floating exchange rate systems (Panagariya 1999). With the liberalization measures in the nineties, India has adopted managed floating exchange policy. The Indian Rupee has also been made convertible on the current account since the Government of India initiated reforms in 1991. India has recognized the interrelationship between the trade policy regime and the exchange rate policies. ASEAN's economic importance in the larger Asia-Pacific region and its potential to become a major partner of India in the area of trade and investment has encouraged. India to seek closer linkages with these countries. After 1991, a conscious effort was begun to reach out to these countries as part of our 'Look East' policy'. The fact that the ASEAN countries had consolidated themselves into a dynamic regional grouping accelerated Indias efforts. In this section, we will study the impact of India's economic reform on its exports to ASEAN countries through the econometric technique (Maddala 1992). Here the hypothesis is that there has been a structural shift in India's exports in post-reform

15

period: 1992-97. To capture the impact of economic reform, we use a dummy variable (D9197), additionally, in equation (1) of the form: Log Xjt = a + b*t + c*D9197 --------------------------(2) where, D9197 = 1 for post-reform years (i.e., 1991 to 1997) = 0 otherwise (i.e., 1977 to1990). Therefore, null hypothesis H0 : Dummy variable is not significant.

Whereas, alternative hypothesis H1: Dummy variable is significant It should be mentioned, although, the sample period chosen in this paper ranges from 1977 to 2001, the estimation of equation (2) is based on the basis of sample period 1977-1997. We assume the years under period 1998-2002 were abnormal years because of ASEAN financial crisis. The estimated coefficient of dummy variable gives the following results in Table VIII. TABLE VIII REGRESSION COEFFICIENT OF DUMMY VARIABLE @ Country Co-efficient(c) Standard Error(c) t-Ratio(c) R-Bar-Squared DW-statistics Indonesia 2.078 0.552 3.760 0.585 1.140 Malaysia 0.535 0.161 3.304 0.929 1.121 Philippines 1.430 0.432 3.305 0.815 1.051 Singapore 0.314 0.197 2.045 0.907 1.510 Thailand 0.645 0.251 2.563 0.909 1.24 Note: @ Regression Equation (2) using data from IMF's International Financial Statistics-Yearbook, various issues. It can be said from table that the co-efficient of dummy variable has been found to be significant, as measured by 't ratio (c), at 5 per cent significant level in explaining India's exports to all ASEAN countries. It can be said there has been a positive structural shift in post-reform period in India's exports to all ASEAN countries. This positive

16

structural is much stronger in case of India's exports to Indonesia, Malaysia and Philippines than that to Singapore and Thailand.

IV.DETERMINANTS OF EXPORT FLOWS FROM INDIA TO ASEAN A.THE EXPORT DEMAND MODEL In order to identify the determinants of trade flows between India and the ASEAN countries, the problem of explaining bilateral export is separated into two steps (Armington 1969, Winter 1984). The first is the allocation of expenditure between domestic goods and imports at country level. The second is the distribution of commodities according to their geographical origin. This approach allows one to abstract from the simultaneous explanation of the volume of trade and its origin and concentrate only on the latter. In other words, the specification of demand functions in foreign trade first determines total demand for imports of buyer country, and then independently allocates demand among competing sources of supply. Thus, it is assumed for present purposes that total import demand in each ASEAN country has already determined in the national econometric models, and only the allocation decision will be considered here (Sarkar 2004). We specify India's exports to jth ASEAN country as a demand function of country jth ASEAN country, so that it may be called the import function of jth ASEAN country for Indias exports. Thus, the system can be seen as an allocation model that explains the

17

India's exports to jth ASEAN country as a function of imports of buyer country and Indias unit value of exports relative to domestic price level of buyer country. The specification of bilateral export demand function is as follows: Xj = a + b Mj + c (UVX /PYj) + Uj-----------------------------(3). Where, j = 1,2,3,4 and 5 (five ASEAN countries: Indonesia, Malaysia, Philippines, Singapore and Thailand). Xj = Exports of India to jth ASEAN country in million US Dollars at constant price . Mj = Aggregate imports of jth ASEAN country in million US dollars at constant price. UVX = Indias Indices of unit value of exports in terms of US dollars (1995 =100) PYj = GDP deflator of jth ASEAN country in US dollar term (1995=100) Uj = Error term Here, the assumptions are: i) b is positive implying higher world imports of jth ASEAN country would increase India's exports to that country, and lower imports would decrease India's exports to that country. ii) c is negative implying higher India's export prices relative to domestic price of jth ASEAN country would decrease India's exports to that country and vice-versa.

To get a direct measure of elasticity, the final form of equation to be estimated has been assumed in log-linear form of equation (3) in real term: Log (Xj/UVX) = + Log (Mj/PYj) + Log (UVX/PYj) + Vij ---------(4). Where,

18

: Elasticity of India's exports to jth ASEAN country with respect to total imports of that country. : Elasticity of India's exports to jth ASEAN country with respect to India's unit value index of exports relative to domestic price level in that country (to represent cost of production of buyer country). B. Database, Methodology and Data Analysis The time series data required for the estimation are based on bilateral exports of India to individual ASEAN country, the aggregate imports of individual ASEAN country, unit value of exports of India, GDP deflator of individual ASEAN country, and the exchange rates of five ASEAN countries and India. The data on former two variables has been collected from IMFs Direction of Trade Statistics-Year Book, various issues. The series of unit value index of exports, exchange rates and GDP deflator with base at 1995 have been taken from IMFs International Financial Statistics Year Book, 2003. All data on quantity variables are measured in million US dollars. For transformation of variables from nominal to real term, we have proceeded in following manners: Dividing unit value of exports in local currency by exchange rate of India, we get Indias unit value of exports in dollar while domestic price deflator of jth ASEAN country in dollar is obtained dividing domestic price deflator in local currency by the exchange rate of the concerned ASEAN country. Indias real export to jth ASEAN country is obtained dividing Indias nominal exports in dollars by unit value of exports in dollars. Real imports of jth ASEAN country is obtained dividing nominal import in dollars by domestic price deflator in dollar while Indias relative unit value of export in dollar term is obtained dividing Indias unit value of exports in dollar by domestic price deflator of jth ASEAN country in dollar.
19

The most general method of estimating single equation is ordinary least square (OLS) method. However, the application of OLS to a time series regression provides spurious regression if the data series are found to be non-stationary (Dickey and Fuller 1979). In most of the cases, the time series data suffers from the problem of nonstationarity. As we deal with time-series data in this study, we have tested the unit root test for all the variables, namely India's bilateral exports to individual ASEAN country, Indias relative export price, and import bill of ASEAN country. The total number of variables is fifteen. TABLE IX UNIT ROOT TEST FOR VARIABLES (Dickey-Fuller statistics-DF and Augmented Dickey-Fuller statistics-ADF) India's Exports Bilateral Real Real Imports of India's Relative Buyer Country Exports Price Index Exports (Xj/UVX) (Mj/Pyj) (UVX/PYj)

DF ADF DF ADF DF ADF Indonesia -2.014 -1.805 -2.192 -3.489 -3.167 -3.373 Malaysia -2.112 -2.091 -1.930 -1.582 -2.884 -2.740 Philippines -2.904 -2.681 -2.304 -2.201 -2.655 -2.345 Singapore -2.589 -2.845 -2.989 -3.159 -1.953 -2.007 Thailand -2.087 -1.845 -2.780 -2.294 -2.487 -2.872 95 % critical value for the ADF statistics = - 3.621. Note: 1) All variables are measured in natural logarithm. 2)) Unit root tests have been performed using Microfit 4.0 (Pesaran and Pesaran 1997). The table IX displays the Dickey-Fuller (DF) and the augmented Dickey-Fuller (ADF) statistics for testing the unit root hypothesis together with the associated critical values. It is clear from the table for all fifteen variables in the study, neither DF nor ADF statistics accept the stationarity in data. The unit root hypothesis can not be rejected for all the variables at conventional significance levels. In other words, all the variables

20

under consideration are non-stationary on their levels. Therefore, the application of OLS (Ordinary Least Square) method to the regression model will give spurious relationship. Consequently, equation (4) will be estimated using the fully modified OLS method proposed by Phillips-Hansen's (FM), which takes into account the non-stationarity in the data as well as potential endogeneity of the right hand variables and autocorrelation of the error term (Phillips and Hansen, 1990 and Phillips and Loretan, 1991). The computation of this estimator involves a semi-parametric procedure which is asymptotically equivalent to maximum-likelihood approach, and allows us to estimate the long-run elasticities and in equation (4) using cointegrating regression but correcting the estimates to take account of possible simultaneity and serial correlation effects. The precondition for applying FM technique is that the dependent variable and the regressors are integrated of order 1, i.e. they have unit roots. In order to apply FM technique, the testing procedure described above, we first need to determine whether all variables employed in the model are I(1), i.e. integrated of order one. The unit root tests employed are Dicky-Fuller (DF) and Augmented DickyFuller (ADF) tests. The results obtained by applying these tests to the series of data set for all the variables in their first difference have been presented in Table X. The unit root tests confirm that all the series employed are integrated of order one, i.e.I(1). Therefore, the precondition for Phillips-Hansen's FM method is satisfied.

21

TABLE X UNIT ROOT TEST FOR VARIABLES IN FIRST DIFFERENCE (Dickey-Fuller statistics-DF and Augmented Dickey-Fuller statistics-ADF) India's Exports Bilateral Real Real Imports of India's Relative Buyer Country Exports Price Index Exports (Xj/UVX) (Mj/PYj) (UVX/PYj)

DF ADF DF ADF DF ADF Indonesia -5.254 -2.986 -3.370 -3.479 -4.765 -3.030 Malaysia -5.202 -4.450 -3.084 -3.146 -5.591 -2.746 Philippines -6.830 -4.913 -3.313 -3.021 -4.456 -3.272 Singapore -4.669 -3.425 -3.256 -3.309 -4.974 -3.390 Thailand -5.016 -3.900 -3.159 -3.236 -5.721 -3.630 95 % critical value for the ADF statistics = - 2.985. Note: 1) All variables are measured in natural logarithm. 2) Unit root tests have been performed using Microfit 4.0 (Pesaran and Pesaran 1997).

C. Regression Results

The regression results of FM estimates for the model (equation 4) are reported in Table XI using the Microfit 4.0 for Windows software (Pesaran and Pesaran 1997). The sample period ranges from 1977 to 2001.The table shows that two explanatory variables bear expected sign in all the cases. The coefficient of real import of an ASEAN country has been found to be statistically significant at 1 per cent level for all the five cases. Further, India's export price relative to domestic price of an ASEAN country bears expected negative sign with statistical significance at 1 per cent level in all the cases. As the variables in the regression equation (4) are measured in logarithm, the corresponding

22

coefficient gives the direct measure of elasticity of India's export with respect to price and imports. In case of India's exports to Indonesia, it has been found to be elastic with respect to both India's export price and total imports of buyer. However, the import elasticity is less than price elasticity. In case of exports to Malaysia, India's export has been found to be slightly inelastic with respect to both variables. India's export to Philippines has been found to be elastic with respect activity variable as well as price variable, particularly the former. On the other hand, India's export to Singapore is inelastic with respect to import while it is elastic with respect to price. In case of Thailand, the reverse is true. In this case, India's export is elastic with respect to total import while is inelastic with respect to price. TABLE XI PHILLIPS-HANSEN'S FULLY MODIFIED ESTIMATES (Parzen weights, truncation lag = 1, Trended case) Dependent variables Co-efficient of independent variables (Figure in parenthesis shows tabulated 't' value) India's Real exports to jth Real imports bill India's export price Intercept ASEAN country (Xj/UVX) of jth ASEAN relative to domestic () country (Mj/ PYj) price of jth ASEAN country (UVX / Pyj) Exports to Indonesia (XIN) 1.764* -1.838* -11.534 (6.103) (-2.480) (-2.614) Exports to Malaysia (XML) 0.954* -0.983* -4.764 (18.009) (-2.883) (-5.633) Exports to Philippines (XPH) 2.044* -1.807* -14.848 (7.814) (-3.081) (-6.533) Exports to Singapore (XSN) 0.772* -1.520* -4.882 (3.304) (-4.008) (-5.860) Exports to Thailand (XTH) 1.323* -0.812* -8.112 (25.648) (-3.379) (-17.280) Note: 1) All variables are measured in natural logarithm. 2) The value in the parentheses below each co-efficient give estimated `t ratio for the corresponding coefficient. 3)*: Denotes that the respective co-efficient is significant at 1 % level.

23

The elasticity of import in three cases out of five exceeds unity. The elasticity of India's exports with respect to Philippines' import has been found to be highest. The lowest one has been observed in case of India's exports to Singapore. The estimated activity elasticity reveals that a one percentage point increase in ASEAN imports leads to 1.764 percentage point increase in the demand for India's exports to Indonesia, 0.954 percentage point increase in the demand for India's exports to Malaysia, 2.044 percentage point increase in the demand for India's exports to Philippines, 0.772 percentage point increase in the demand for India's exports to Singapore and 1.323 percentage point increase in the demand for India's exports to Thailand. The relative price elasticities for three out of five ASEAN countries exceed unity. The highest one has been found in case of India's exports to Indonesia, while the lowest one has been found in case of Indias exports to Thailand. The estimated price elasticity reveals that a one percentage point decline in Indias relative export price would leads to 1.838 percentage point increase in the demand for India's exports to Indonesia, 0.983 percentage point increase in the demand for India's exports to Malaysia, 1.807 percentage point increase in the demand for India's exports to Philippines, 1.520 percentage point increase in the demand for India's exports to Singapore and 0.812 percentage point increase in the demand for India's exports to Thailand. V.CONCLUSIONS The ASEAN crisis led its adverse impact on ASEAN imports. In this empirical study, we have quantified the adverse impact on Indias export during 1997-1999. The Indias policy makers should be cautious about this fact so that they can take appropriate measures, if necessary, to safe guard their own economy. Following the econometric

24

technique, we have found a positive structural shift in Indias export to ASEAN region in the post-reform period. The main objective of this study is to find the determinants of Indias export flows to individual ASEAN countries. The consideration of individual countries in the study shows that there exist significant differences in export demand elasticitys in the ASEAN countries with different levels of economic development when explaining their behavior as importers from a common trade partner, India. As regards to the results of the trade model, it can be said that it has performed very well in terms of sign and significance of the explanatory variables. The result of this study reveals valuable insight for policy purposes. The expenditure effect on India's export to ASEAN has found to be positive. In other words, the demand for India's exports is influenced by the growth of ASEAN imports. Therefore, it can be infer from this study that economic growth in ASEAN region would be transmitted to Indian economy through trade channel.

In formulating either a commercial or exchange rate policy, one major concern of India's policy makers is the responsiveness of export flows to relative price changes. This question is especially important, as India has recently signed preferential agreements with ASEAN countries. The study shows that India's export is price competitive in the ASEAN market. The devaluation in India currency would be helpful to raise its exports to this region. Further, Indias preferential trade agreements with ASEAN countries would also helpful to raise its exports to this region.

REFERENCES

25

Adams, F. G., and I. M. Davis. The Role of Policy in Economic Development of the East and Southeast Asian and Latin American Experience. Asian-Pacific Economic Literature 8 (1994): 8-26.

Armington, Paul S. A Theory of Demand for Foreign Products Distinguish by Place of Production. International Monetary Fund Staff Papers XVI (1969): 159-176.

Asher, Mukul G. and Rahul Sen. India-East Asia Integration: A Win-Win for Asia. Economic and Political Weekly September 3(2005): 3932-3940. Baru, Sanjaya. India and ASEAN: The Emerging Economic Relationship towards a Bay of Bengal Community. Working Paper No.61 New Delhi: Indian Council for Research on International Economic Relations, 2001.

Bhagwati, J. N. Development economics: what have we learned? Asian Development Review 2 (1984): 23-38.

Bhattacharyya, B. Currency turmoil in South East Asia and East Asia: Impact on Indias exports. Occasional Paper No.12 New Delhi: Indian Institute of Foreign Trade, 1998.

Dickey, David A., and Wayne A. Fuller. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of American Statistical Association 74 (1979):427-31.

26

Findlay, R.

Trade and Development Theory and Asian Experience. Asian

Development Review 2 (1984): 23-42.

James, W. E., Naya, S. and G. M. Meier. Asian Development: Economic Success and Policy Lessons Madison:University of Wisconsin Press, 1987.

Krueger, A. O.Trade Policy as an Input to Development. The American Economic Review 70 (1980): 288-292.

Kumar, Nagesh, Rahul Sen and Mukul Asher (ed.). India-ASEAN Economic Relations: Meeting the Challenges of Globalization. New Delhi: RIS (Research and Information System for Non-aligned and Other Developing Countries), 2006.

Maddala, G. S. Introduction to Econometrics. Second Edition. New York:Macmillan Publishing Co., 1992. Marquez, J. (1990), Bilateral Trade Elasticities, Review of Economics and Statistics, Vol.72, pp.70-77. 22.Mehta, R. (1997), Trade Policy Reforms 1991-92 to 1995-96- Their Impact on External Trade, Economic and Political Weekly, 12 April. Noland, M., Liu, L., Robinson, S. and Z. Wang (ed.). Global Economic Effects of the Asian Currency Devaluations. Washington, DC: Institute for International

27

Economics, 1998.

Panagariya, Arvind. Trade Policy in South Asia: Recent Liberalisation and Future Agenda. The World Economy 22 (1999): 353-377.

Pesaran, H.M. and B. Pesaran. Working with Microfit 4.0: Interactive Econometric Analysis. London: Oxford University Press, 1997.

Phillips, Peter C.B. and Bruce E. Hansen. Statistical Inference in Instrumental Variables Regression with I(1) Processes. Review of Economic Studies 57 (1990): 99-125.

Phillips, Peter C.B. and Mico Loretan. Estimating Long-Run Economic Equilibria. Review of Economic Studies 58 (1991): 407-36. Resnick, S. and E. Truman (1973). An Empirical Examination of Bilateral Trade in Western Europe, Journal of International Economics, 3,November, 305-335. Sarkar, Amal. A Trade Linkage System for SAARC. Foreign Trade Review XXXIX (2004): 3-42.

Shishido, Shuntaro, and Tomoyoshi Nakajima. Asian Currency Crisis and the Role of Japan. The Development Economies XXXVII (1999): 3-34.

32.Winter, L. Alan (1984), Separability and the Specification of Foreign Trade Functions, Journal of International Economics, 17, pp.239-263.

28

29

You might also like