Error Correction, Cointegration and Aggregate Import Demand for Syria

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This paper has estimated import demand functions for Syria based on annual data for the period 1970-1995. The gross domestic product has a significant effect on explaining the change in the import demand where the equilibrium estimated import demand elasticity with respect to income and price are  0.867 and –0.074; respectively. The price elasticity is low, perhaps because of the deformation of the import structure pricing and the multicolinearity effect.  
         
This study shows using two stages Engel-Granger approach for cointegration that the variables of import, income and prices are non-stationary time series. The result of error term with negatively significant sign in the second stage is an indication of the fact that the variables in the import demand function are cointegrated. The disequilibrium of the demand imports is corrected from period to another by 0.86 percent.
 
           The Johansen’s test rejects the null hypothesis that there are no cointegrating vectors and accepting the hypothesis of at least three cointegrating vectors is existed. This means that the whole structure of demand is cointegrated during the studying period. The long run income elasticity is about 1.692 where the price elasticity is - 0.249.
 
          The estimated results confirm the significance and limited role of the relative prices in explaining the changes in import demand. This is because of the differentiation in the exchange rates, tariff variations, interrelated import availability with export revenues in artificial way, and increasing smuggling activities. This would justify the necessary recommendation of unifying exchange rates and removing the organizational and administrative obstacles from legal imports to limit illegal imports as represented by smuggling activities.
 
        Regarding the income, the estimated results showed the positive relationship with import demand. This means that the economic development that occurred in Syria during the last twenty-five years did not success in substituting domestic output for imports that kept raising as the income increases. It is notable from the increasing in income elasticity that the economic development in Syria would be joint by increasing in the import levels. This is true especially if it is accompanied by the IMF recommendation of unifying the exchange rates and removing the structure disturbances in the Syrian economy that resulted from the organizational, administrative and pricing obstacles.