The Foreign-Income and Real-Exchange-Rate Elasticities of Bangladesh Exports

Abstract

Bangladesh began implementing trade-reform policies in the mid 1980s, leading to a gradual change in its anti-export-policy. Since then the share of exports in her GDP has been rising steadily with the economy growing at about 5 percent per annum. This growth is associated with structural change in the country’s export composition favouring non-traditional exports, namely garments and frozen foods. This paper specifies and estimates an aggregate export-demand function; deploys Pesaran’s bounds-testing approach to estimate export-elasticities of foreign income and the exchange rate; and tests for the stability of the estimated function. The empirical results, based on annual data for the period 1973-2010, suggest a long-run relationship between real exports and export-weighted foreign real income. Similarly, real exports and the real effective exchange rate of the taka are found to be related. Finally, the results suggest that the dynamic behaviour of exports possesses an error-correction representation. The CUSUM and CUSUMSQ tests suggest no significant instability in the export-demand function. However, the recursive and rolling-regression coefficients indicate that the export-demand function has undergone some structural change since the early 1990s. This is reflected in the decreasing sensitivity of real exports vis á vis the exchange rate. JEL classification: C32, F11 Keywords: Exports’ Elasticities, Pesaran’s Bounds Test, Export-demand Stability, Bangladesh