Dr. Manuel Cantavella-Jordá
Instituto de Economía Internacional
Departamento de Economía
Universitat Jaume I
12071 Castellón, Spain
Email: mcantave@eco.uji.es
Carlos M. Guerra Espinosa
Departamento de Economía Empresarial
Universidad de Camagüey, Cuba
Email: carlos.guerra@reduc.edu.cu
OBJECTIVES
Most of the empirical work on foreign trade relationships has been addressed to less developing countries. However, insignificant attention has been paid to a country like Cuba. It is true that the Cuban economy is marginal in the world economy (0.09 percent of gross domestic product in 2007 according to CEPAL, Comisión Económica para América Latina), but probably more important is the lack of official data on some macroeconomic variables what it makes it difficult, more often than not, to undertake economic research on this country.
The objective of this research is to analyze the external sector on Cuban tobacco from the export demand perspective towards Europe by focusing on price and income elasticities. The period used in the analysis is annual and goes from 1988 to 2008. As far as known, this paper is the first of its kind which analyzes the export demand for Cuban tobacco in bilateral trade with euro area. As another novelty of this study, we build a tobacco-specific exchange rate to better capture the distinctions of this sector when competing overseas.
METHODOLOGY
The starting point for analyzing the demand for Cuban tobacco exports is based on the imperfect substitutes model set out by Goldstein and Kahn (1978). Econometrically, we apply cointegration in the Fully-Modified Ordinary Least Squares framework proposed by Phillips and Hansen (1990) in order to obtain long-run estimates of elasticities. Then, an error correction mechanism is constructed to take account of short-run effects and long-run deviations from any disequilibrium of the export demand equation.
RESULTS
We found that price elasticity of exports for both the long and the short term are quite inelastic and practically the same. The estimates of the income elasticity of demand present sign and magnitudes that are reasonable according to those presented in the economic literature even though mostly are on an aggregated basis. Long-run deviations from the export demand equation are found to adjust rapidly.
Cuban tobacco is a traditional sector in Cuba that employs an important part of population and provides foreign exchange earnings for the economy. The stability of the price elasticity parameter in the model can become an interesting control variable for economic policy purposes. There is statistical evidence that income elasticity plays a significant role in the determination of export growth for Cuban tobacco. Despite possible deviations from equilibrium in the short term, the error correction system proves that some functional relationship among observable variables (exports, price and income) holds.
Golstein, M. and M.S. Khan (1978), “The Supply and Demand for Exports: a Simultaneous Approach”, Review of Economics and Statistics, Vol. 60, pp. 275-286.
Phillips, P.C.B and B.E. Hansen (1990), “Statistical Inference in Instrumental Variables Regression with I(1) Processes”, Review of Economic Studies, Vol. 57, pp. 99-125.