Download Effect of Exchange Rate on Non-Oil Exports of OPEC Countries

Applied mathematics in Engineering, Management and Technology 2 (2) 2014:566-575
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Effect of Exchange Rate on Non-Oil Exports of OPEC Countries
1 Fatemeh Mohagheghzadeh *,2 Parichehr Nasiri,3 Faegheh Mohagheghzadeh,4Maryam
Mahdizadeh
1,2,3Department of Economics, College of Human Sciences، Buinzahra branch, Islamic Azad University, Buinzahra,Ghazvin. Iran
4 Department of Economics, Arak Branch, Islamic Azad University, Arak, Iran
*Corresponding author, E-mail: [email protected],
Abstract
The purpose of this research is to study and discover the impact of official exchange
rate on non-oil exports of OPEC countries between 1975 and 2010. The statistical
population of the investigation consists of oil countries including Iran, Saudi Arabia,
United Arab Emirates, Kuwait, Qatar, Venezuela, Nigeria, Libya, and Ecuador. The
time series statistics are collected from Central Bank of the Islamic Republic of Iran
and the World Bank. Data analysis is performed in the form of panel data in the
software Eviews 7.
Necessary tests for studying durability of under-study variables, panel data, and
needed tests for studying the model with fixed or random effects are carried out
using Hausman statistics, and required tests for recognition of co-linearity have been
also done.
The results show that there is a positive and significant relationship between non-oil
exports and official rate of exchange. Indeed, non-oil exports increase with an
increase in exchange rate and vice versa. Because with increased official rate of
exchange, the actual value of domestic currency decreases and domestic goods will be cheaper for foreigners and exports
will increase.
Also, considering the model estimation it is seen that in OPEC countries there is a positive significant relationship between
domestic production, domestic price, trading, and prior period non-oil exports with non-oil exports.
1. Introduction:
One of the important factors in achieving a stable economic growth and development is export boom which is
the main goal of policies in foreign trading sector. In Iran’s economy due to importance of reducing the
dependence of economy on earnings from crude oil export and the role of non-oil exports in decreasing this
dependence, and also its position in economic development plans of country, it is so important to study
determinants of non-oil exports and provide solutions for developing it. Therefore, controlling exchange rate
changes as one of determinants in non-oil exports is important in the boom of non-oil exports for economic
growth and development of the country. On the other hand, according to many of studies, disruption and
volatility in the real behavior of exchange rate has negative effects on other sectors including exports. Hence,
analysis of the real behavior of exchange rate and studying its determinants for adjusting this index in order to
increase international competitiveness of the country and boom of export have been always a great part of
economic studies. Thus, first of all we study the relationship between non-oil exports and official exchange rate.
The everyday-increasing importance of independence from oil earnings - because of fluctuations and instability
of prices and world demand for oil which affects government’s earnings and country’s economy to external
factors - has made the role of non-oil exports more than a tool for achieving exchange earnings. Hence, many of
experts and economy and development researchers have focused on analysis of current situation of non-oil
exports, determinants of forming export-oriented sectors and their function, and also finding strategies for
developing non-oil exports. In Iran, because of relatively sufficient exchange earnings from oil exports, non-oil
exports have never been considered to be serious. Statistics and data say that whenever the exchange earnings
from oil exports have increased, the attention to non-oil exports has reduced. Maybe the main reason for the
lack of attention to non-oil exports by authorities is due to their emphasis on exchange earnings from oil, not the
effects which exports of non-oil goods, especially industrial goods can have on economic structure of the
country.
The hypothesis of research is:
- There is a positive and significant relationship between official rate of exchange and non-oil exports.
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The purpose of this study was to evaluate the functional impact of the official exchange rate on increase or
decrease in exports of the OPEC countries.
In this research, econometric techniques will be applied and we will use the Eviews software for fitting.
Assessed data for these countries is considered over a 35-year period starting from 1975 to 2010.
In this paper, we first introduce the OPEC countries, and then the variables used in this study including: Exports
in the economy (oil and non-oil), domestic production, domestic prices, the official exchange rate, foreign
income, capital goods and intermediate imports, exports, and prior period trade relations will be explained.
Then, the research model is estimated, and finally analysis of hypothesis testing, conclusions, and
recommendations will be discussed.
2.Introduction of OPEC
The Organization of Petroleum Exporting Countries (abbreviated as OPEC), is an oil cartel comprising Algeria,
Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arabic Emirates, Ecuador, Angola, and
Venezuela. The international headquarters of OPEC is in Vienna, Austria since 1965. OPEC stands for the
English name, i.e., Organization of Petroleum Exporting Countries founded in the conference held on
September 10 to 14, 1960 in Baghdad, held by representatives of Iran, Iraq, Kuwait, Saudi Arabia, and
Venezuela.
The main goal of this organization, as expressed in its statute, is: “coordination and unification of petroleum
policies of member countries and determination of the best solution for their individual or collective interests,
design of methods to ensure stable oil prices in international oil markets in order to eliminate harmful and
unnecessary fluctuation's, special attention to oil-producing countries and particular attention to the necessity of
providing a steady income for oil-producing countries; providing oil for oil-consumer countries efficiently,
cost-effectively, permanently, and fair and proper returns for those who invest on oil industry, …”
The everyday-increasing importance of independence from oil earnings - because of fluctuations and instability
of price and world oil demand which affect government’s earnings and economy of a economy by foreign
factors - has caused the role of non-oil exports to be introduced more than a tool for achieving exchange
earnings, so most experts and economic and development researchers’ emphasize on analyzing current situation
of non-oil exports, determinants of forming export-oriented and their function, and also finding strategies to
develop non-oil exports.
3.Exports in Economy
Export is the transfer of domestically produced goods or raw material, or semi-manufactured goods imported in
separated parts into the country and exported after deformation or assembly. Only the goods the export method
of which is based on one of the methods: exchange, cross-border trade, border barter or deal or passenger barter
(which is set on customs declaration) aare reported in the exports table. Export in oil-producing countries which
a great part of their exchange earning or gross domestic and national production is from selling and exporting
oil and oil products is divided into two distinct parts:
A- Oil and oil materials export
Oil export in oil-rich countries like Iran has a great proportion in country’s economy. On one side this revenue
provides a great proportion of the country’s exchange needs, and on the other side it is the major provider for
government expenditures. Basically, in such countries, development planning strongly requires such revenues.
In the case of unfulfilled expected revenues, some parts of developing plans can stop, and the economy actually
cannot achieve the expected growth rate. In such conditions, volatility of oil exports will be negatively
associated with economic growth. On the other hand, there may be situations where this relationship is positive.
Whenever an instability factor causes an uncertainty situation which reduces consumption and in turn, increases
savings and investment, it will lead to economic growth.
B- Non-oil exports
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One of the main axes of economic policy is increasing the share of nation's economy and improving its position
in international trade and the world economy. This is important because selling oil and oil productions and its
revenue is always under change and instability. So because of reliance of the country’s economy on earnings
from oil selling, and limitation of oil reservoirs, to reduce economy’s dependence on crude oil export and turn
to multi-product industry, export policy attitudes should change to products in which country has relative
advantage. Also, experience of many countries has shown that without having oil reservoirs they could be
among developed countries, and their products have values several times more than oil and its products. Giving
attention to non-oil exports and effective measures to its improvement need a competitive environment which
itself makes it inevitable to participate in world trading organization widely.
In this study, we deal with non-oil exports as dependent variable, which is a function of official exchange rate,
level of domestic production, domestic price level, income, foreign trade and prior period exports.
4.Official exchange rate
The exchange is foreign currency, and exchange rate is its price. Due to the countries’ need to trade with each
other, currencies of different countries are exchanged with each other. Based on this, exchange rate shows the
price of one country's currency in terms of another country's currency at a certain time. Using exchange rate,
currency of different countries can be changed into each other and transactions are made.
The official exchange rate is the official and fixed rate of exchange in terms of gold and US dollar which is
declared to International Monetary Fund.
Official exchange rate refers to the exchange rate determined by national authorities or to the rate determined in
the legally sanctioned exchange market. It is calculated as an annual average based on monthly averages (local
currency units relative to the US dollar).
5. Level of domestic production
Gross Domestic Production (GDP) is the total value of a country’s produced goods and services at market
prices over a specified time period (usually a year). GDP is one of the methods to measure national productions
and revenue of a country. The other definition for GDP is the total added value in all stages of good producing
and services in a country in a particular time-period, and its value is defined by a particular currency.
6. Domestic Price Level
Increased domestic price level due to cheaper foreign goods’ than domestic ones leads to the rise of real imports
and replacement of domestic goods by foreign ones. Increase in domestic prices will lead to decreased real
exports, but increase or decrease in the monetary value of exports depends on price elasticity of foreign demand
for export. If the price elasticity of demand is greater than one, increase in the value of money leads to decrease
in export (Bronson, 2004). Rise of exchange rate reduces the price of imports in terms of dollars, and increase
in real imports, but reduction or increase in imports depends on price elasticity of demand for imports.
7. Capital and intermediate imports
Capital goods refer to those which are used directly in the production of goods or services. While being durable,
these goods increase productivity of other factors of production and create added value. Intermediate goods
refer to the goods reformed in the production process or ripen into new commodities. As it is known,
intermediate goods are the ones which go into production process and are converted into destination goods.
Capital goods are the goods which are used to produce other goods and services. So as much as the country's
manufacturing sector continues its growth and development, in order to produce more goods and services, the
need for intermediate goods and capitals will be more.
Capital goods include durable equipment and machinery required in the industrial and manufacturing sectors
and vehicles for economic services. Imports of intermediate goods and raw materials constitute the largest part
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of a country's imports. Major items of imports of this part are raw materials, spare parts of machinery and
construction, and required materials of agricultural and ranch sectors.
8. Foreigners’ income
It is the same GDP of the whole world that is the sum of GDPs of all counties.
9. Trade
Trading relation, capital transfer, and international aids are considered as foreign factors. Trade relationship is
the ratio of prices of exported goods to prices of imported goods. Import and export prices should be calculated
in terms of the domestic currency or foreign currency. Since a country’s price of imported or exported goods
will increases as the value of national money reduces, the exchange relation of a country can also reduce,
increase or remain unchanged. Also, the type of change depends on the rise or reduction of the price of exported
goods or its change simultaneously with changes in price of imported goods.
10. Prior period oil export
Export is the relationship and cooperation with professional markets and professions of market beyond the
boundaries. Export is the start point of communication with others. Export is for growth and economic
development of the country which is achieved by selling products and services to other countries to gain
exchange revenues and make remarkable help to create economic balance.
Relative price of export is one of the other affective variables in the export demand function. This price is equal
to the ratio of implicit price index of exported goods to implicit price index of world exported goods. Relative
price of exports variable has a negative impact on the export demand function. If the implicit price index of
exports is relatively larger than the world price index, the domestic consumers’ demand for domestic goods will
be reduced and goods from other countries will be substituted.
11. The research model
In this section, the impact of exchange rate on non-oil exports of OPEC countries in a 35-year period (19752010) is studied.
According to what presented, our model is given as follows:
X=F(GDP, P, RATE, Yf, IM K +I, LTOT, X(-1))
where the variables indicate the level of domestic production, domestic prices, exchange rate, foreigners’
income, sum of capital and intermediate imports, commercial trading, and prior-period non-oil exports.
Time series statistics are collected from Central Bank of the Islamic Republic of Iran and the World Bank.
Eviews 7 has been employed to estimate the model.
12.Descriptive analysis of variables of the study
At first, a descriptive statistics of variables in the model is presented. Table (1) shows a summary of descriptive
statistics of the variables.
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Table (1): Results for descriptive statistics of OPEC countries.
Non-oil
exports
Domestic
production
level
Domestic
price level
Exchange
rate
Foreigners’
earnings
Commercial
transaction
Time trend
Prior period
non-oil
exports
Averag
e
Standar
d
deviatio
n
Maxim
um
Minimu
m
Number
of
observa
tions
3.19E
+09
7.04
E+10
61.83
141
3.663
983
3.15
E+13
0.787
584
18.50
000
3.03E
+09
1.09E
+10
7.13
E+10
46.13
843
4821.
864
9.83
E+12
0.331
346
10.40
436
1.03E
+10
6.04E
+10
15.000
21
3.63
E+11
1.67
E+10
274.9
727
0.072
342
2600
0.00
0.004
300
5.11
E+13
1.85
E+13
2.200
629
0.291
641
36.00
000
1.000
000
5.88E
+10
15.00
021
324
324
324
324
324
324
324
324
Reference: Calculations of the research
Standard deviation
indicates the
dispersion amount
of
numbers
around
the
mean.
The more this amount, the more dispersion of the numbers form the mean. As it is viewed in Table (1), the
maximum standard deviation is for exchange rate which shows the less congruence of of this variable for the
under-study countries.
13.Plot for the distribution of the variables
In this section, plot of the distribution of independent variables is given versus the dependent variable.
Chart (1): Distribution of variables
Reference: Calculations of the research
Chart (1) illustrates the distribution of non-oil exports to domestic production, domestic prices, exchange rate,
foreigners’ income, trading, and the prior period non-oil exports. Foreigners’ income has the most dispersion.
14.Durability test
Durability test is performed mainly to avoid spurious regressions. To avoid spurious regression, variables must
be durable; otherwise, difference of the variables which are usually durable, should be applied.
15.Why is the durability test necessary?
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Durable data are the ones with constant average, variance, and autocovariance for any definite lags. Durability
or indurability of a time series may have a serious impact on its behavior and properties. For example, when a
shock enters a stable (durable) time series, its effects on the variable is damping and gradually disappears, i.e.,
influence of the shock at time t is less than time t-1. In contrast, indurable data are the ones for which the
influence of a shock is unbounded, i.e., impact of the shock at time t is not less than its effect at time t-1.
The use of indurable data can lead to spurious regressions. For two durable variables which are independent
random series, when one of them is fitted on the other one, they will have a relatively lower t and R2. This
situation is obvious for independent variables, but if they have a time trend, and have not logical connection
with each other, regression of one on the other will have a high R2. Therefore, in such circumstances, if
standard regression techniques are appropriately applied, the results indicate a good regression in which all
coefficients are significant and also R2 is high, but obviously this is a spurious regression with a tidy
appearance.
16.Durability test of variables
To avoid spurious regressions in the above estimation, one has to make sure of the durability of the variables. In
the case of durability of variables, the spurious regressions will not occur in the above estimations. For this
purpose, firstly by using panel unit root test, durability or indurability of the variables are examined.
17.Durability test at the level
Table (2): Durability test at the level
Variable
Level
Probability
NEX
5,4649
1.00
GDP
7.9654
1.00
P
7.7520
1.00
RATE
2.4729
0.00
YF
5.9822
1.00
LTOT
3.8617
0.00
NEX1
3.4904
0.99
IM
Reference: Calculations of the research
Durability tests at the level show that RATE and LTOT have probabilities of less than 0.05, so they are at the
stationary (durable) level. GDP, NEX, P, YF, and NEX1 have probabilities of higher than 0.05, and so they are
not the stable (durable) level; Hence, the first- and second-order differences are used to make them durable. The
results for durability are presented in Table (3).
18.LLC Unit root test
For the durability test of the model variables, in this part of the Levin-Lin-Chu (LLC) test statistic is used. The
results are given in Table (3).
Table (3): Results of the LLC unit root test.
Variable
Level
Probability
D(NEX)
3.7885
0.00
D(GDP)
2.8321
0.00
D(p,2)
6.9337
0.00
RATE
2.4729
0.00
D(YF)
9.0259
0.00
LTOT
3.8617
0.00
D(NEX1)
4.5625
0.00
IM
-
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Reference: Calculations of the research
Durability test results show that all variables have a probability of lower than 0.05, thus all of the variables are
stationary (durable). Therefore, the null hypothesis, based on the existence of LLC unit root can be ruled out.
19.F-Limmer test for the use of pooling or panel data
Since the structure of data is a combination of time-series and cross-sectional data, one needs to use F-Limmer
test to determine whether to apply pooling or panel data. In F- Limmer test which is carried out by the F-test
statistic, the null hypothesis means the homogeneity of countries, (i.e., the use of Ordinary Least Squares (OLS)
method) and rejection of the null hypothesis suggests the use of panel data for OPEC countries. Looking at
Table (4), F-Limmer statistic (0.332536) and the probability (0.9530) the H0 hypothesis cannot be rejected, and
the model is pooling.
Table (4): F-Limmer test
Table (4): Results of the Chow test (F-test)
Reference: Calculations of the research
20.Variance heteroskedasticity tests
Table (5): Variance heteroskedasticity test
Chi2
Prob
8.24
1.000
Reference: Calculations of the research
According to the results of Stata software which are represented in Table (5), the probability is 1.000 which is
larger than 0.05. Therefore, the null hypothesis based on the variance homogeneity is verified at the level of
0.05%,
and
the
model
does
not
have
variance
heteroskedasticity.
21.Autocorrelation test
Autocorrelation occurs when the errors are related to each other. In other words, the error term of an
observation is affected by the error term of another observation. In cross-sectional data, it is often expected
from the dependent variable of an observation to affect only on the dependent variable of the same observation,
and not to be related to other observations. Some reasons for the autocorrelation test are:
A) In some cases, an important variable is omitted and autocorrelation occurs.
B) In some circumstances, transformation of data to different components causes an autocorrelation.
C) In the cases where the form of the model is wrong, and it suffers from an explicit bias of the form of our
model, autocorrelation occurs.
One of the methods of detecting autocorrelation is to use Durbin-Watson statistics which is calculated according
to the following formula:
n
d 
 (et  et 1 ) 2
t 2
n
 (et ) 2
t 1
et : The error term at time t
et−1 : The error term at time t-1
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After calculating the Durbin-Watson statistic, it is compared by the relating table which based on the number of
observations (n) and the number of independent variables (k) is in the form of lower limit (dl ) and upper limit
(du ), and decision is made regarding the following conditions:
if
if
if
0  D.W  dl : existence of positive autocorrelation
dl  D.W  d h : uncertainty about the positive autocorrelation
d h  D.W  4  d h : lack of autocorrelation
if
4  d h  D.W  4  dl : uncertainty about the negative autocorrelation
if
4  d l  D.W  0 : existence of negative autocorrelation
It is obvious that when the Durbin-Watson statistic is close to 2, indicates the absence of autocorrelation in the
model.
Another method of detecting autocorrelation is the LM-test in E-views software. In this test, the desired
autocorrelation order which by default is 2 is determined, then regarding the F-statistic if the calculated P-value
is greater than 0.05, there is no autocorrelation (at the 5% level).
Table (6): Autocorrelation test
Chi2
Prob
3.508
0.0611
Reference: Calculations of the research
According to the results of Stata software which are reported in Table (6), the obtained probability is 0.0611
which is larger than 0.05. Therefore, the null hypothesis suggesting of the lack of autocorrelation is confirmed,
and thus the model have no autocorrelation.
22.Estimates of the final model, discussions and detailed analysis of the findings
The final model is obtained as given in Table (7).
Table (7): Model estimation after inclusion of dummy variables
Estimated
Probability value
Variables
t-statistic
coefficients
(prob)
D(NEX)
C
-1.47E+08
-0.249709
0.80
D(GDP)
0.103621
3.485771
0.00
D(p,2)
57794552
2.506899
0.01
RATE
77749.24
2.204043
0.02
D(YF)
2.75E-05
0.085336
0.93
LTOT
1.07E+09
1.987023
0.04
IM
-41437709
-2.167821
0.03
D(NEX1)
0.176140
3.762559
0.00
DUM1
-9.09E+09
-8.004988
0.00
DUM2
8.98E+09
9.216564
0.00
Prob(=0.0000)
F=22.42999
R-2=0.38
R2=0.2040 DW=1.91
Reference: Calculations of the research
According to the results in Table (7), the explanatory variable D (YF), which has a probability of 0.93 has no
significant influence on the model and will be removed from the model. The final model is obtained as reported
in Table (8).
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Table (8): Final estimation of the model after removing the insignificant variable
Estimated
Probability value
Variables
t-statistic
coefficients
(prob)
D(NEX)
C
-1.34E+08
-0.235977
0.81
D(GDP)
0.104056
3.558859
0.00
D(p,2)
58364161
2.649323
0.00
RATE
77857.34
2.212232
0.02
LTOT
1.08E+09
2.009622
0.04
IM
-41061548
-2.211343
0.02
D(NEX1)
0.175926
3.769707
0.00
DUM1
-9.10E+09
-8.025763
0.00
DUM2
8.97E+09
9.243722
0.00
Prob=(0.0000)
F=25.31745
R-2=0.38
R2=0.40 DW=1.91
Reference: Calculations of the research
Table (9): The final estimation of the model obtained from E-views
Reference: Calculations of the research
23.Discussion and analysis of findings
Results for the impact of exchange rate on non-oil exports of OPEC countries during 1975-2010 can be
analyzed using panel data as follows.
The value of R2 statistic indicates that 0.40 of the changes in non-oil export variable is explained by variables
included in the model. Also, with respect to the statistic value f=25.31745 and the associated probabilities of all
variables which are smaller than 0.05, approves the significance of overall model.
According to the model estimation in Table (9) it can be said that in OPEC countries, a unit rise of the first
order difference of domestic production results in the increase of 0.10 million dollars in non-exports of OPEC,
and a unit enhancement of the second order difference of domestic production causes to its increase by
58364161 million dollars. Because rise of domestic prices reduces the value of the national currency, as a result
of which, our goods will be cheaper to foreigners, and thus non-oil exports increase. Hence, addition of a unit to
exchange rate, increases non-oil exports by 77857.34 million dollars, addition of a unit to trading rises non-oil
exports of OPEC goes up by 1.08 million dollars, and addition of a unit to the first-order difference of the priorperiod non-oil exports, non-oil exports of OPEC enhances by 0.175926 million dollars. Also, variable IM that
represents the time trend, and variables DUM1, DUM2 used in the model are significant.
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24.Results of hypotheses testing
In this section, conclusions are made by the results of our hypotheses testing. The present study attempted to
test the following hypothesis.
“There is positive and significant relationship between non-oil exports and exchange rates.”
Hypotheses were assessed based on tableau data from nine countries of OPEC members during 1975 to 2010
and using the panel data approach. As the result, our hypothesis expressing positive relationship between nonoil exports and the exchange rate can be agreed and approved, because as the exchange rate increases non-oil
exports go up. Therefore, appropriate exchange rate policies to boost non-oil exports could play a key role in
the future capacities and achieving economic growth.
25.Policy recommendations
- To increase non-oil exports, conditions such as facilitation of customs duties, stability of legislations, and
foundation of trade unions should be increased.
- According to the results, policy makers should make decisions to reduce dependence on revenues from oil
exports, and the best option in this regard is paying more attention to non-oil exports.
Beneficial from revenues from oil exports, in the country's infrastructures and to boost production in the
country could be among the options to be considered by the authorities.
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