TRENDS AND CYCLES IN IMPORT PENETRATION IN THE UK: REPLY
| Published date | 01 February 1979 |
| DOI | http://doi.org/10.1111/j.1468-0084.1979.mp41001007.x |
| Date | 01 February 1979 |
TRENDS AND CYCLES IN IMPORT PENETRATION
IN THE UK: REPLY
By JAMES J. HUGHES AND A. P. THIRLWALL
The chief criticism of Whitley and Wilson concerns our failure to estimate a
fully specified model of import penetration. Whether or not this criticism is
justified can only be judged in relation to the aims of our original paper. Those
aimswhich we stated unambiguously at the outsetwere (i), to describe trends in
import penetration and (ii) to examine whether deviations from trend in import
penetration are significantly related to the pressure of demand in industrial labour
markets.
Clearly, since in our attempt to describe we did not purport to explain, the
criticism is not justified in terms of our first aim. The criticism is applicable only
to our second aim, and even then is valid only if it can be shown that our failure
to work with a full model gives rise to misleading results, i.e. if our approach finds
a stronger relationship between import penetration and the capacity variable than
might be reasonably expected in a fully specified model. Although the Whitley-
Wilson results suggest that this might be the case, their results are by no means
conclusive. The differences might be explained by the different levels of dis-
aggregation of the two studies. They estimate their fully specified model for
only 26 SAM industries while our estimates are for 105 MLH industries.
We agree that relative prices should be included in a fully specified model of
import penetration. Indeed we implied so in the statement quoted by Whitley
and Wilson on p. 69 of their paper. However, we are unaware of the existence
of relative price data at the MLH level. Therefore, even if we had wanted to
estimate a fully specified model at the MLH level we would have been unable to
include a relative price variable. But data problems apart, it is unlikely that
rising import penetration for most of our period can be explained by changes in
competitiveness. This is because competitiveness has moved in favour of UK
manufacturing industry since 1967 as a result of exchange rate changes. Indeed,
if relative prices are a significant determinant of imports, then their effect during
the period 1967-74 must have been such as to offset the influences of other factors
raising import penetrationunless, of course, the effect of relative prices is asym-
metrical, exerting a positive influence when relative prices move against the UK,
but no effect when prices move in favour of the UK. This would be a further
example of a ratchet effect.
While we agree that income (or demand) might also be included in a fully
specified model of import penetration, given that the income elasticity of demand
for imports differs from unity, it is impossible to predict, a priori, what the sign
on the income variable will be. This is particularly true of a disaggregated model.
The existence of a capacity constraint is one of the reasons why the income elasticity
of demand may differ from unity. Where such a constraint exists the income and
the capacity variables might be highly correlated. To the extent that imports
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