Abstract:
This paper investigates the conventional import demand function for
Pakistan using time-series data sourced from the World Development Indicators for
the period 1970 to 2010. Using a vector error correction model and impulse response
functions, we show that, for the given period, relative prices and income lose their
significance as long-run determinants of import demand. This indicates the need for
additional determinants. We compare the residuals of the conventional import
demand function with those of a model that includes the terms of trade and foreign
exchange availability (in addition to the conventional parameters) as determinants of
import demand, and find that the latter largely resolves much of what is
nondeterministic in the former model. The paper also explores the peculiar trend of a
falling imports-to-GDP ratio (from the 1980s to the 2000s), which is unusual for a
developing country. In a subsidiary regression analysis for this period, we argue that
falling net capital inflows explain this persistent fall in the imports-to-GDP ratio.
The recovery thereafter, when Pakistan started catching up with other developing
economies, may have been responsible for the 2008 balance-of-payments crisis.
