ARE THERE SHORTFALLS in MENA TRADE? To What Extent Are They Due to the Rise in EU Trade and Investment and Other Factors? - PowerPoint PPT Presentation

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ARE THERE SHORTFALLS in MENA TRADE? To What Extent Are They Due to the Rise in EU Trade and Investment and Other Factors?

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ARE THERE SHORTFALLS in MENA TRADE? To What Extent Are They Due to the Rise in EU Trade and Investment and Other Factors? RANIA S. MINIESY BRITISH UNIVERSITY IN EGYPT – PowerPoint PPT presentation

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Title: ARE THERE SHORTFALLS in MENA TRADE? To What Extent Are They Due to the Rise in EU Trade and Investment and Other Factors?


1
ARE THERE SHORTFALLS in MENA TRADE? To What
Extent Are They Due to the Rise in EU Trade and
Investment and Other Factors?
  • RANIA S. MINIESY
  • BRITISH UNIVERSITY IN EGYPT
  • JEFFREY B. NUGENT
  • UNIVERSITY OF SOUTHERN CALIFORNIA
  • June 8, 9, 2006
  • CNR Institute of Studies on Mediterranean
    Studies
  • International Conference on Bridging the Gap
    The Role of Trade and FDI in the Mediterranean

2
INTRODUCTION
  • Evidence Although still controversial, important
    evidence that trade growth is causal to income
    growth (Frankel Romer 1999).
  • Growth has lagged in MENA at least until the
    exploding oil prices of the last two years.
  • Could slow trade growth contribute to this?

3
Why has MENA trade not been thoroughly
investigated as a slow-growth determinant?
  • 1) Other, possibly potentially more important,
    slow-growth determinants have been investigated.
  • Role of institutions (Elbadawi 2005 , Kuran 2004)
  • Human Capital Formation (UNDP 2003,2004,
    Pritchett, 1996)
  • High fertility rates and rapid population growth.
  • (Williamson and Yousef 2002).
  • Inflexible labor market institutions
    (Pissarides and Vergazones-Varoudakis 2006,
    Campos, Hsiao and Nugent 2005).
  • Capital accumulation

4
Why has MENA trade not been thoroughly
investigated as a slow-growth determinant?
  • 2) The presence of numerous methodological
    difficulties that may have discouraged empirical
    investigations of both the determinants of trade
    and its effects on growth.
  • a. Problems of measurement of trade policy
  • b. Traditional measurement OPENNESS is an
    outcome variable (interdependence between trade
    and trade policy and economic growth.
  • but c. Frankel Romer 1999s innovation.

5
Why has MENA trade not been thoroughly
investigated as a slow-growth determinant?
  • 3) Effects of trade on growth have sometimes
    been found to be considerably weaker for MENA
    countries than for other countries.
  • (Makdisi, Fattah and Limam 2005)
  • 4) The most common measure of openness
    (XM)/GDP is often unusually large for MENA
    countries leading to conclusion that MENA
    countries do not trade too little

6
Purpose of this paper
  • To use the gravity model to answer a series of
    questions
  • 1) Do MENA countries trade more or less with
    themselves and with other countries than would be
    expected on the basis of gravity type
    explanations?
  • MENA trades less than expected in both cases
  • 2) What determines the extent of these trade
    shortfalls and the extent to which they might be
    reduced by the introduction of additional
    controls?

7
Purpose of this paper
  • 3) Does EU-EE relationship compete with EU-MENA?
  • EE has outperformed MENA in attracting FDI
  • IFDI Performance Indices 1990-96
    1997-2004
  • MENA 1.28 0.66
  • EE 1.82 1.84
  • 4) Can the shortfalls be reduced by introducing
    variables representing political shocks, (civil
    and international wars), trade policy
    considerations, and institutional considerations
    such as legal traditions and governance?

8
Organization of the paper
  • Section 2 Gravity model and applications to the
    MENA region.
  • Section 3 Identifies Data base used in this
    study, presents results with and without a dummy
    variable for MENA, and as additional explanatory
    variables are added.
  • Section 4 Compares results across different
    specifications and estimation procedures
  • Section 5 Compares MENA with East Asia and the
    MENA2 and MENA-World Trade Shortfalls across
    Specifications Summarizes and contains
    conclusions for policy and further research.

9
ALTERNATIVE MODELS FOR TRADE
  • 1. Trade equations involving relative prices
    and other relative factors that reflect
    comparative advantage considerations.
  • 2. CGE models.
  • 3. Gravity models.

10
Advantages of Gravity Models
  • Can be derived from underlying microeconomic
    foundations (Bergstrand, 1985).
  • Less subject to simultaneous and omitted variable
    biases as compared to the other two models.
  • Use much more reliable databases than CGE models.
  • Results shown to be quite robust to different
    specifications, modeling assumptions and data
    sets and applicable to all kinds of countries and
    time periods (Leamer and Levinsohn, 1995)
  • Qualifications (Anderson and Van Wincoop) Can be
    Mitigated by Including Broad range of size and
    other controls and Fixed effects

11
Gravity Models and MENA Trade
  • Applications to MENA region are relatively rare.
  • Ekholm et al. (1996)
  • Low Potential for trade growth both within MENA
    and with EU. (May have discouraged further
    investigations in MENA).
  • Limitations of Study
  • Small sample of countries 13 DCs and 11 LDCs for
    one year
  • Small number of variables included
  • Findings Counterintuitive and inconsistent with
    most other studies. Hence, results could be
    misleading.
  • Other Studies Al-Atrash and Yousef (2000)
  • Miniesy, Nugent (2005), Miniesy, Nugent and
    Yousef (2004)

12
THE GRAVITY MODEL
  • The standard gravity model estimated in the
    literature and followed with certain
    modifications here is
  • Ln (Tijt) ß0 ß1 Ln Xijt ß2 Ln Yij ?1ij
    ?2t uijt
  • Data Virtually all countries in the world for
    1970-2000 for data taken at three to five year
    intervals.
  • We focus on aggregate trade flows.
  • The loglinear equation is limited to the
    variables that are continuous. Many of the
    variables are either qualitative or dummy
    variables which are non-continuous.

13
Results Basic Gravity
gdp 1.021753 (0.02)
gdppc_time -0.0363614 (0.00)
LnGDPPCdiff -0.2578801 (0.07)
gini_final -0.0122259 (0.01)
gini_lngdpf 0.0030216 (0.00)
ll -0.2464937 (0.05)
14
Results More Basic Gravity
language 0.4676306 (0.06) cu 1.664587 (0.18)
regional 0.6934212 (0.18) OneFTA -0.0057971 (0.05)
colonizer 1.198327 (0.17) OneFTA90s -0.051591 (0.02)
colonial 1.057564 (0.51) m2gdp 0.0000944 (0.00)
15
Less Standard Gravity Variables
Common_L -0.1068 (0.08) war_intl -0.1479 (0.22)
French_L -0.1030 (0.06) war_intl_intensity 0.0791 (0.12)
German_L -1.668 (0.47) war_civil -0.0882 (0.03)
Socialist_L 2.7892 (0.30) war_civil_intensity -0.0731 (0.04)
oil1npn -0.0045 (0.00)
16
Impacts of MENA Interactions with Variables Named
Below
Variable Basic Model Basic Model gdppc distance areas border gov_ds
gdppc 0.32 0.32 0.35 0.32 0.32 0.32 0.34
distance -1.3 -1.3 -1.31 -1.4 -1.3 -1.3 -1.31
areas -0.12 -0.12 -0.12 -0.12 -0.14 -0.12 -0.12
border 0.63 0.63 0.39 0.64 0.62 0.7 0.68
gov_ds 0.09 0.09 0.09 0.09 0.09 0.09 0.09
MENA2 -2.38 -2.38 2.32 -5.71 -3.68 -2.33 -2.21
MENA2_World -1.13 -1.13 -0.46 -2.94 -2.25 -1.13 -1.15
MENA2_gdppc -0.3
MENA2_distance 0.44
MENA2_areas 0.1
MENA2_border -0.36
MENA2_gov_ds 0.18
MENA2_World_gdppc -0.04
MENA2_World_distance MENA2_World_distance MENA2_World_distance 0.21
MENA2_World_areas MENA2_World_areas 0.08
MENA2_World_border MENA2_World_border 0.2
MENA2_World_gov_ds MENA2_World_gov_ds -0.03
17
Effects of Adding MENA2, MENA2_W and EU-EE
Interactions with Year
Variable 1. Basic Model 2 MENA2 MENA 2-World 3. Col. 2 EU_EE
gdppc 0.32 0.3087 0.3085
distance -1.3 -1.4006 -1.4012
areas -0.12 -0.1480 -0.1483
border 0.63 0.6572 0.6568
gov_ds 0.09 0.1253 0.1253
MENA2 -2.38 -2.8553 -2.8578
MENA2_World -1.13 -1.1860 -1.1868
MENA2_1997 0.3974 0.3974
MENA2_2000 0.2231 0.2238
MENA2_W1997 -0.2670 -0.2670
MENA2_W2000 -0.3807 -0.3800
EU_EE -0.9443
EU_EE_only2000 0.2507
18
SUMMARY OF THE FINDINGS
  • MENA countries trade less than their Asian
    counterparts and than would be predicted on basis
    of gravity model
  • But less so for more distant countries
  • 2) Why?
  • Less trade-friendly policies
  • Weaker governance characteristics
  • Coincidence of EU-EE Trade expansion and MENA
    decline but these do not affect the MENA trade
    shortfalls.

19
SUMMARY OF THE FINDINGS
  • 3) Having a common border has a less positive
    impact on trade among MENA countries, suggesting
    that customs procedures, cooperation on
    procedures, infrastructure, at borders within
    MENA may be more detrimental to trade than
    elsewhere.
  • 4) Generally speaking, controlling for
    non-observed omitted factors through fixed
    effects increases size of the estimated
    shortfalls. Hence studies without fixed effects
    may underestimate the shortfalls

20
TRADE POLICY RECOMMENDATIONS
  • Eliminate existing restrictions on current
    account transactions.
  • Improve internal transport and communications
    infrastructure
  • Simplify and improve customs procedures at the
    borders so that having common border with a
    trading partner would exert a stronger positive
    influence on trade of MENA than at present.
  • Reduce the likelihood and strength of civil and
    international conflicts that exert rather sizable
    negative influences on trade.

21
TRADE POLICY RECOMMENDATIONS
  • Increase financial depth measured by M2/GDP.
  • Promote greater and better implemented trade
    pacts with both MENA and non-MENA countries
  • Improve compliance with agreements with penalties
    for non-compliance.
  • Improve governance in MENA countries and choose
    partners with better governance and at same
    levels of per capita income.
  • EU should impose stricter time limits on MENA for
    homogenizing policies and institutions.
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