Structural Change in the Import Demand Function forPakistan

The question of structural stability of the Aggregate ImportDemand Function (IOF) has important implications for modelling,forecasting as well as policy- making related to the trade sector, ingeneral and imports in particular. A structural change, in quantitativeterms, may be reflected as a change in one or more parameters of theimport demand function. Analysing the possibilities, timing and thenature of such a change is important since it affects the estimates ofthe relevant elasticities. In the case of Pakistan, the issue of thepossible structural change in the IOF has not been studied much in spiteof its importance. The two notable exceptions are Sarmad (1989) andNaqvi and Khan (1989). In Sarmad (1989) while the main purpose was tochoose between the linear and log-linear functional forms for the IOFthere is incidental treatment of structural change when he specifies adummy to account for the dislocation of economic activity caused by theseparation of East Pakistan in 1971. Thus he implicitly hypothesizesthat structural change occurred only in term of the intercept.1 However,he also reports that there may have been a structural shift in 1982-83in the import demand for manufacturing. Again, Naqvi and Khan (1989)report a significant 1971-72 dummy coefficient in case of imports ofmanufactured goods and significant 1972-73 dummy Jor imports of servicesadjusted for interest payment on foreign debt.