Foreign trade flows and economic activity in Slovenia - causality patterns from a transition episode

The paper employs conditional causality technique to identify the possible empirical relationship or relationships between exports, imports and economic growth in the transition period of the Slovenian economy. Four main conclusions can be drawn from the analysis. First, the evinced bi-directional causality between exports and variables of economic activity in aggregate data, in manufacturing as a whole and in the majority of the sub-sectors (industries) examined, suggests that any characterization of a small country’s growth as export-driven may be perfunctory at least. Secondly, on a level of aggregate data, imports of goods and services are clearly governed by domestic incomes. Thirdly, neither aggregate-level data nor total manufacturing provide any support for the modernization hypothesis, since exports of goods (and services) drive the corresponding import flows. In individual manufacturing industries, the number of cases with bi-directional causality is roughly balanced by the number where export flows generate sub-sectoral import demand. Fourthly, causality estimates of sub-sectoral exports, imports and production suggest that the majority of manufacturing industries display a circular causality, in which the endogeny of the variables observed leaves only limited scope for policy engagements.