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Diplomatic Relations and Trade Reorientation in Transition Countries

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Title: Diplomatic Relations and Trade Reorientation in Transition Countries


1
Diplomatic Relations and Trade Reorientation in
Transition Countries
  • Mathilde Maurel (CES, Université de Paris 1
    Panthéon Sorbonne)
  • Emiel Afman (Ministry of Finance, the Hague)
  • The views expressed are on personal title and are
    not to be attributed to one of the institutions
    above (they do not necessarily converge)

2
This presentation
  • 1. Introduction
  • Focus on post-transition trade reorientation
  • 2. Empirical approach
  • Two measures of diplomacy (two datasets)
  • One is time invariant
  • The second one varies over time
  • 3. Results Discussion

3
Economic diplomacy is not new
  • Columbus, Marco Polo, and others often received
    government finance missing market.
  • www.diplomatie.gouv.fr
  • La diplomatie économique ne date pas dhier.
    Dès 1720,
  • le Régent de France envoyait à Madrid, avec son
    nouvel
  • ambassadeur,  un financier marchand pour les
    affaires de commerce  (Saint-Simon)
  • Andrew Rose (2007)
  •  Is there a raison dêtre for the Foreign
    Service? One answer increasingly given is that
    the Foreign Service promotes exports. 

4
Transition has many dimensions
  • Economic reorientation of external trade
  • Political closer diplomatic relations
  • E.g. France created 15 embassies over less than
    10 years
  • Is there a significant relationship?

5
Central Question
  • Basically the same as Andrew Rose
  • Can we replicate a similar relationship between
    permanent foreign missions and trade, focusing on
    transition countries?
  • We use the gravity equation

6
This presentation
  • 1. Introduction
  • Focus on post-transition trade reorientation
  • 2. Empirical approach
  • Two measures of diplomacy (two datasets)
  • Panel
  • country pair specific fixed effects
  • 3. Results Discussion

7
30 Transition Countries East
8
26 industrialized countries (OECD before
enlargement) West
9
Two measures of Economic Diplomacy two different
datasets
  • Equations 1 and 2
  • FMij Number of Permanent Foreign Missions
  • Invariant over time in our first sample
    1997-2005
  • only cross country (pair) variation
  • Equations 3 and 4
  • FMijt Correlates of War dataproject (Resat
    Bayer)
  • Latest three observations 1995, 2000 and
  • 2005. Variation over time and across country
    pairs

10
First dataset
  • Trade flows between 26 OECD countries and 30
    Transition economies
  • Two directions
  • 8 years (1997 2004)
  • 30x26x2x8 12480 observations max

11
Descriptive Statistics FMij
12
We notice that on average
  • Transition countries have more exporting foreign
    missions in OECD countries than vice versa (1,92
    vs 1,04)
  • Countries with natural resources have more export
    promoting missions than countries without (2,17
    vs 1,07)
  • Transition countries with natural resources have
    the highest number of export promoting missions
    2,84 (and host a higher number of import
    facilitating missions than transition countries
    without natural resources)

13
Intuition? (west-east, 2004)
Log of Exports
Foreign missions of exporting country i in
importing country j
14
Second dataset
  • FMijt Correlates of War dataproject (Resat
    Bayer)
  • Trade flows of 30 transition economies to 26 OECD
    countries (one direction only)
  • 3 years (1995 2000 2005)
  • 30x26x1x3 2340 observations

15
Second measure FMijt
16
Average exports (mln usd) by FMij
17
Countrypair specific fixed effects
  • Kazakhstan exports more oil than Belarus,
    irrespective of the number of foreign missions
    we relax the restriction of one intercept.
  • Relation Georgia-Netherlands differs from the
    relation Georgia-France countrypair
    heterogeneity
  • ? Cheng et Wall 2004   heterogeneity bias due
    to cultural, historical and political factors
    that are . often difficult to observe, let alone
    quantify

18
Gravity Equations 1 and 2
  • Benchmark Roses (2007) specification

Robustness check 1 Two steps, countrypair
specific fixed effects, first dataset
19
Gravity Equations 3 and 4
  • Robustness check 2
  • countrypair specific fixed effects, CoW-data


Robustness check 3 Anderson and Van Wincoop
(2003) specification
20
This presentation
  • 1. Introduction
  • Focus on post-transition trade reorientation
  • 2. Empirical approach
  • Two measures of diplomacy (two datasets)
  • Panel
  • country pair specific fixed effects
  • 3. Results Discussion

21
Equation 1 Rose (2007) in one stepforeign
missions invariant over time
  • No country fixed effects, No time dummies
  • Ln Exp
  • 0,166 fmi 0,033 fmj 1,391 distance
    0,968 GDP i 0,694 GDP j 0,143 pop i
    0,277 pop j 0,023 area i 0,040 area
    j 0,788 EEA 0,333 border 0,131
    landlocked
  • Significant at 10 5 1
  • R2 0,7306
  • N 10930

22
Equation 1(Ctd) Rose (2007) in one stepforeign
missions invariant over time
  • With importer and exporter fixed effects, with
    time dummies
  • Ln Exp
  • 0,136 fmi 0,070 fmj 1,364distance
    0,344 GDP i 0,688 GDP j 0,616 pop i
    0,310 pop j 0,893 area i 0,070 area j
    0,274 EEA 0,335 border 0,269
    landlocked 2.745 industrialized exp.
  • Significant at 10 5 1
  • R2 0,79
  • N 10930

23
Robustness check 1 Rose (2007) in two steps
foreign missions invariant over time
  • With time dummies and bilateral fixed effects
  • Ln Exp 0.625GDPi0.647GDPj-0.619Popi-0.
    627Popj0.019EEA
  • Fixed effects0.125fmi0.126fmj-0.051dist
    ance-0.104areai-0.098areaj-0.426border-0.
    093landlocked
  • Significant at 10 5 1
  • R20.2684
  • N 12000

24
Equation 2(followed)
25
Robustness check 2 Rose (2007) with second
dataset (CoW-data) foreign missions variable
varying over time, bilateral fixed effects
26
Robustness check 3 Anderson and Van Wincoop
(2003) with foreign missions variable varying
over time
  • 1996 Ln Exp ln GDPi ln GDPj
    0.304fmi0.443fmj -1.43distance
  • 2000 Ln Exp ln GDPi ln GDPj
    0.423fmi0.283fmj -1.502distance
  • 2005 Ln Exp ln GDPi ln GDPj
    0.146fmi0.594fmj -1.44distance
  • Sigma 5, -0.088 (1996), -0.084 (2000),
    -0.087(2005)
  • Sigma 10, -0.040 (1996), -0.038 (2000),
    -0.040(2005)
  • Sigma 20, -0.019 (1996), -0.018 (2000), -0.019
    (2005)

27
Conclusions
  • In all estimated equations (except Rose (2007)
    with time-varying foreign mission variable), we
    found a strong association between investing in a
    foreign mission and trade intensity
  • Quantitative interpretations
  • Opening an Embassy is associated with an extra
    trade of about 49 (CoW-data) Having one more
    consulate is associated with an extra trade 15
    (First datasets) ? same orders of magnitude as
    Rose.
  • The second approach relying upon the Anderson and
    Van Wincoop model, tells us that opening an
    Embassy is equivalent to an ad valorem tariff
    reduction varying from 2 to 8
  • A large network of foreign representations seems
    to have a large positive pay-off to home
    economies in terms of exports.

28
Diplomatic Relations and Trade Reorientation in
Transition Countries
  • Emiel Afman (Ministry of Finance, the Hague)
  • Mathilde Maurel (CNRS, Université de Paris 1
    Panthéon Sorbonne)

29
  • Questions?
  • Merci!
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