An Econometric Analysis of Bilateral Import Demand in South Africa

One of the most significant challenges facing any society is the allocation of scarce economic resources that have alternative uses. Though imports can streamline the allocation of scarce resources in an economy, the potency of a country’s import policies are subject to the magnitude of import elasticities with respect to income, domestic prices, foreign prices, and exchange rates. This research estimates the bilateral income, domestic price, import price, and exchange rate elasticities between South Africa and its five largest trading partners: China, Germany, the United States, India, and Saudi Arabia using quarterly data from 1998 – 2017. The bounds testing approach to cointegration tests for a long run relationship among the variables and an autoregressive distributed lag model is used to estimate short and long run bilateral elasticity estimates. An error-correction model is used to estimate the rate at which short run shocks are absorbed and equilibrium reestablished. This research contributes to the literature in four ways. First, this research estimates bilateral import demand elasticities as opposed to aggregate elasticities. The range of elasticity estimates suggest tailored policy decisions based on the unique characteristics of each bilateral trade relationship may be beneficial instead of a single policy ascertained from aggregate elasticity estimates. Second, this research separates the relative price variable, typically expressed as a ratio of import price to domestic prices, into distinct independent variables. When the relative price variable is used, the effects of the two variables used to construct the relative price variable are assumed to be of equal and opposite magnitude. This research provides evidence that this assumption merits reconsideration in the literature. Third, this research includes the real effective exchange rate variable and a control variable for periods of recession. Fourth, this research uses an error correction model that estimates the rate at which short run shocks are absorbed and equilibrium reestablished