Import Demand Function: Some Evidence from Madagascar and Mauritius

Abstract

This paper empirically analyses the long-run relationship among the variables in the aggregate import demand functions of Madagascar and Mauritius in order to evaluate the appropriateness and effectiveness of the structural adjustment programmes (SAPs). Given the small sample size, we use the recently developed UECM-based ‘bounds test’ to investigate cointegration. The study confirms the existence of cointegration relationship. The long-run income and price elasticities are, respectively, 0.855 and −0.487 for Madagascar and 0.671 and −0.644 for Mauritius. The stabilisation and devaluation policies under the SAPs can be effective in reducing import demand. Export demand functions are also estimated. The Marshall–Lerner condition is fully met for Mauritius but unequivocal inference cannot be drawn for Madagascar. While both countries achieved lower external deficits, their economies have shown dissimilar growth performance, with remarkable expansion in Mauritius versus mitigated growth in Madagascar. Hence, the ultimate policy objective should not be confined in containing imports, but should seek to simultaneously improve external balance and economic growth.

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