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The Gravity Approach for Trade Diversification in Central Asia MAENO Takaaki, Nihon University Workshop on Economic development of New Silk Road 26 – 27 August, 2011 Motivations • Two main motivations – It is to reveal an important characteristics of trade structure for Central Asian countries that locate at the geographically middle of the new silk road. – It is to clarify the impact of trade costs on trade flows for landlocked countries through measuring trade costs and estimating the determinants of them. And also, we will give some implications of economic development for countries on new silk road. • We focus on the trade structure of Central Asian countries. Outline 1.Introduction 2.Being Landlocked and Trade Cost 3.An Analysis of Trade Structure of Central Asia 4.Panel Data Analysis 5.Conclusion the Caucasus region 1.Introduction • Since the late 1980s, MNEs in the developed countries, including Japanese firms, expands their business overseas, and East Asian countries have achieved high economic growth through production process sharing. • Decreasing Trade Costs – One of the main reasons for trade expansion in East Asia is due to decreasing in trade costs • What about the trade structure of Central Asian countries? 2.Being landlocked and Trade costs(1) • Taking the concept of “Firm heterogeneity” into international trade theory, it is becoming empirically more important to analyze many kinds of trade costs as one of the factors to disturb trade. – Tariff, Distance, Remoteness, Being Landlocked, Institution, Time, Infrastructure, Language, etc. • Many countries are facing many trade costs, but “Being landlocked” is one of the largest trade costs . • Early Studies • – • Kurmanalieva (2008) Focusing on the trade pattern of Kyrgyzstan, he empirically explains that the traditional trade theory and even the intra-industry trade theory cannot explain the trade structure in Kyrgyzstan Iwata, Kato, Shibasaki (2010) – • They analyze the relations between transport costs and economic growth in Mekong regions Behar&Venables (2010) – They test and explain the geographical factors, being landlocked, seriously matters for trade. 2.Being Landlocked and Trade cost(2) • Why do landlocked countries/regions face higher trade costs than other nonlandlocked countries/regions? – 5 countries in Central Asia are landlocked countries, so they export/import via the third country. – Their potential trade cost is relatively higher than coastal countries. 2.Being Landlocked and Trade cost(3) • Coulibaly & Fontagné (2004) model – They decompose distance factors and introduce the third country effects into trade model. ① Regional context 1. 2. 3. 4. A border factor(which can be proxied by the number of borders to be crossed by the shipped good) A distance factor(which can be proxied by the road distance between the two trade countries) A transit factor(which can be approximated by the road distancefrom the first border to the last border crossed by the imported good) An infrastructure factor(which can be estimated by the presence of paved roads between the two trading partners) ② Extra-regional context 1. 2. Extra-regional distance(to be crossed the imported good before reaching the developing region) Inland distance(Distance to be crossed by imported good within the developing region) 2.Being Landlocked and Trade cost(4) Note: Coulibaly & Fontagné (2004) 2.Being Landlocked and Trade cost(5) 3. An Analysis of Trade Structure of Central Asia (1) • RCA • Export Similarity Index • Trade Decomposition 3.1 RCA • Compare comparative advantages taking into account of the characteristics of traded products. RCAim,t – – – – – – EX ik,t EX iTotal ,t EX Wk ,t EX WTotal ,t EX : export value i : exporter m : a characteristic of products based on BEC k : traded goods W : world t : period 13 RCA:Primary Goods Primary goods BEC 111 21 31 Average BEC 111 21 31 Average BEC 111 21 31 Average Kazakhstan 1997 2007 5.174 8.365 7.438 2.879 12.542 6.264 8.384 5.836 Japan 1997 2007 0.015 0.029 0.197 0.264 0.004 0.035 0.072 0.109 Malaysia 1997 2007 1.616 0.539 1.007 0.730 0.053 0.131 0.892 0.467 Kyrgyzstan 1997 2007 3.642 1.007 64.200 65.407 0.005 0.093 22.616 22.169 China 1997 2007 1.834 6.198 1.181 0.734 0.528 0.220 1.181 2.384 Philippines 1997 2007 1.804 1.480 1.474 0.815 0.022 0.232 1.100 0.842 Tajikistan 1997 2007 17.889 9.442 36.628 67.034 n.a. 0.013 27.258 25.496 Rep. of Korea 1997 2007 0.332 0.031 0.316 0.211 0.087 0.020 0.245 0.087 Thailand 1997 2007 2.612 0.639 1.123 1.294 0.048 0.016 1.261 0.649 Turkmenistan 1997 2007 n.a. 0.001 42.081 13.139 22.828 41.812 32.455 18.317 Singapore 1997 2007 0.137 0.119 0.357 0.235 0.164 0.021 0.219 0.125 Uzbekistan 1997 2007 0.325 2.242 12.758 25.819 0.030 4.864 4.371 10.975 Indonesia 1997 2007 0.931 2.696 1.225 2.233 2.586 5.959 1.581 3.629 RCA:Parts & Components Parts & Components Kazakhstan BEC 1997 2007 42 0.516 0.172 53 0.291 0.072 Average 0.404 0.122 Japan BEC 1997 2007 42 1.614 1.749 53 1.541 1.669 Average 1.578 1.709 Malaysia BEC 1997 2007 42 0.794 0.824 53 0.370 0.519 Average 0.582 0.672 Kyrgyzstan 1997 2007 1.445 0.866 1.787 1.263 1.616 1.065 China 1997 2007 0.452 0.981 0.612 0.961 0.532 0.971 Philippines 1997 2007 0.711 0.866 0.359 0.594 0.535 0.730 Tajikistan 1997 2007 0.797 0.095 0.367 0.049 0.582 0.072 Rep. of Korea 1997 2007 0.873 0.982 0.982 0.933 0.928 0.957 Thailand 1997 2007 0.539 0.916 0.688 1.311 0.614 1.113 Turkmenistan 1997 2007 0.333 0.016 0.051 0.046 0.192 0.031 Singapore 1997 2007 1.025 1.108 0.431 0.418 0.728 0.763 Uzbekistan 1997 2007 0.121 0.072 0.475 0.225 0.298 0.148 Indonesia 1997 2007 0.202 0.721 0.494 0.814 0.348 0.767 3.1 RCA(2) • East Asian countries have comparative advantages in P&C that is relatively higher-value added. • Central Asian countries have comparative advantage in primary good that is relatively low-value added. 3.2 Export Similarity Index(1) • Export Similarity Index ESI EX i i ac i i EX ac EX bc 2 • It measures the difference in the export pattern of countries a and b to market c, and it assesses the intensity of competition in exports between various countries to the third market. (Finger & Kreinin,1979, Lee, 1997) – If the commodity distributions of the exports of a and b are identical, then the index can take on a value of 0, and it means the trade structures for country a and b are quite similar and they face more competition at the market in country c. 3.2 Export Similarity Index (2) Central Asia (5 Countries) Year 1996 Kazakhstan-Kyrgyzstan 2007 Japan 0.98 0.97 Korea 1.00 0.97 China 0.65 0.92 USA 0.79 0.98 France 0.84 1.00 Germany 0.63 0.97 Italy 0.98 0.99 UK 0.98 0.94 Russia 0.86 0.90 Kazakhstan-Tajikistan 1996 2007 1.00 0.98 0.98 1.00 0.78 0.98 0.94 0.96 0.88 0.99 0.96 0.99 0.00 0.99 1.00 1.00 0.93 0.95 Kazakhstan-Turkmenistan 1996 2007 1.00 1.00 0.98 1.00 0.75 0.95 0.96 0.80 0.88 n.a. 0.96 n.a. 0.95 n.a. 0.99 n.a. 0.91 0.92 Kazakhstan-Uzbekistan 1996 2007 0.99 1.00 0.96 1.00 0.80 0.92 0.86 0.87 0.86 0.96 0.91 0.97 0.87 0.84 0.47 0.86 0.89 0.90 Kyrgyzstan-Tajikistan 1996 2007 0.99 0.97 1.00 1.00 0.67 0.90 0.99 0.95 0.81 1.00 0.98 0.94 0.85 0.54 1.00 1.00 0.42 0.54 Kyrgyzstan-Turkmenistan 1996 2007 1.00 1.00 1.00 0.98 0.77 0.90 0.97 0.94 0.81 n.a. 0.98 n.a. 0.86 n.a. 0.88 n.a. 0.86 0.83 Kyrgyzstan-Uzbekistan 1996 2007 1.00 1.00 1.00 0.94 0.85 0.94 0.99 0.99 0.81 1.00 0.93 0.87 0.86 0.85 1.00 0.99 0.53 0.61 Tajikistan-Turkmenistan 1996 2007 0.93 1.00 0.79 0.97 0.13 0.91 0.99 0.97 0.10 n.a. 0.59 n.a. 0.23 n.a. 1.00 n.a. 0.88 0.75 Tajikistan-Uzbekistan 1996 2007 0.93 0.99 0.81 0.97 0.50 0.94 0.87 0.98 0.07 0.97 0.59 0.90 0.21 0.91 1.00 1.00 0.44 0.61 3.2 Export Similarity Index (3) ASEAN5 Year 1996 2007 Japan 0.63 0.66 Korea 0.69 0.66 China 0.68 0.50 USA 0.53 0.42 France 0.55 0.74 Germany 0.47 0.39 Italy 0.63 0.73 UK 0.42 0.76 Russia 0.54 0.52 Singapore-Indonesia 1996 2007 0.87 0.82 0.89 0.90 0.88 0.72 0.86 0.83 0.85 0.92 0.87 0.83 0.88 0.86 0.82 0.91 0.92 0.78 Singapore-Philippines 1996 2007 0.56 0.57 0.63 0.46 0.70 0.60 0.66 0.62 0.68 0.75 0.55 0.40 0.67 0.72 0.60 0.76 0.89 0.84 Singapore-Thailand 1996 2007 0.63 0.65 0.70 0.63 0.72 0.50 0.61 0.57 0.75 0.86 0.65 0.61 0.73 0.76 0.58 0.81 0.88 0.72 Malaysia-Indonesia 1996 2007 0.52 0.55 0.50 0.43 0.62 0.59 0.65 0.74 0.67 0.60 0.73 0.70 0.67 0.70 0.75 0.64 0.78 0.54 Malaysia-Philippines 1996 2007 0.61 0.66 0.69 0.69 0.70 0.33 0.37 0.58 0.49 0.41 0.49 0.35 0.64 0.65 0.38 0.64 0.89 0.75 Malaysia-Thailand 1996 2007 0.60 0.59 0.68 0.59 0.65 0.54 0.47 0.48 0.60 0.56 0.52 0.50 0.52 0.58 0.59 0.55 0.83 0.72 Indonesia-Philippines 1996 2007 0.76 0.73 0.88 0.89 0.79 0.76 0.60 0.56 0.54 0.66 0.64 0.77 0.69 0.73 0.77 0.79 0.80 0.74 Indonesia-Thailand 1996 2007 0.74 0.72 0.78 0.80 0.78 0.61 0.54 0.54 0.49 0.57 0.61 0.62 0.67 0.71 0.62 0.63 0.87 0.65 Philippines-Thailand 1996 2007 0.54 0.55 0.73 0.56 0.72 0.63 0.46 0.50 0.56 0.60 0.50 0.56 0.65 0.66 0.67 0.69 0.93 0.76 Singapore-Malaysia 3.2 Export Similarity Index (4) • For ASEAN5, they face quite higher competition in the U.S. and EU market in 1996, but they shift the market to East Asia. • It is strongly associated with the development of production fragmentation in East Asia. • Compared to ASEAN5, there is almost no international competition in the global market for Central Asian countries. • • • • Their industrial structures are different They are relatively less advanced in industrial advances They trade the different characteristics of products They are facing higher trade costs 3.3 Decomposition of Trade(1) • Decomposition of export values – We follow the definition of both extensive and intensive margins in Hummels(2009). – Intensive margin: trade volume of products that have already traded in earlier period – Extensive margin: trade volume of products that are newly traded in earlier period i i jkt TVt * i N jkt extensive margin intensive margin TVt N i – TV : the aggregated value of export for country i at time t (from 1996 to 2007). – N : the number of unique shipments of exported product k to country j at time t. – TV/N : the average value per unique shipment. 21 3.3 Decomposition of Trade(2) • Taking a concept of trade partner into trade decomposition,,,, TVt i N * C *V » » » » TV : the aggregated value of export for country i at time t. N : the number of unique shipments of exported product at time t. : average number of trading partner per product C : average export value per product-partner V 22 3.3 Decomposition of Trade(3) Export Value (million USD) Number of Traded Products Ave. Number of Ave. Export Value per Trading Partner per product-partner products Kazakhstan 1996 2007 1430.142 37025.38 1996 981 2007 4968 1996 0.191 2007 0.968 1996 1457841 Kyrgyzstan 105.276 693.5867 296 1778 0.058 0.347 355662.1 390093.8 200.0506 1094.084 486 1324 0.095 0.258 411626.8 826347.5 Turkmenistan 224.2657 6469.532 263 1112 0.051 0.217 852721.3 5817924 Uzbekistan 1559.067 6460.513 456 (Source) Trade data is from UN Comtrade. 3353 0.089 0.653 3419006 Tajikistan 2007 7452773 1926786 3.3 Decomposition of Trade(4) • Their trade structure have been diversified at the aggregated level. • The number of traded products and partners increases and also the export values per product and per partner increases. 4. Panel data analysis(1) Following the definition of both extensive and intensive margin in Hummels(2009), we use a simple gravity model as… ln TVi , j ,t ln INTi , j ,t ln EXTi , j ,t 0 1 ln DISTANCEi , j 2 ln H _ GDPi ,t 3 ln F _ GDPj ,t 4 ln REMOTENESS Trade 5 ln TARIFF j ,t j ,t 6 ln FDI j ,t 7 ln GDPPi ,t 8 ln GDPPj ,t 9 ln INFRA j ,t ei , j ,t i, j, and t, represent exporter(5 Central Asian countries), partner countries, time (from 1996 to 2007), respectively. 25 4. Panel data analysis(2) • Expected sign Variables Expected Sign Definition GDP-H + Country i’s GDP share to the World GDP in time t GDP-F + Country j’s GDP share to the World GDP in time t DISTANCE - Geographical Distance between i and j REMOTENESS-Trade + Relative distance for country j in time t (weighted by GDP shere) Tariff - Country j's average tariff rate in time t FDI + Country j's FDI net inflows in time t GDPP-H + Country i’s GDP per capita in time t GDPP-F + Country j’s GDP per capita in time t Air_Trans + or - Country j’s volume of goods transported by airplain in time t Road_Trans + or - Country j’s volume of goods transported by road in time t Rail_Trans + or - Country j’s volume of goods transported by railway in time t Estimation results TV N TV/N TV N TV/N TV N TV/N TV N TV/N GDP_H 0.605 0.38 0.29 0.789 0.386 0.454 [8.80]*** [14.60]*** [4.86]*** [9.53]*** [12.31]*** [6.34]*** GDP_F 1.008 0.407 0.613 1.068 0.431 0.646 [16.71]*** [17.19]*** [12.42]*** [16.16]*** [16.86]*** [11.77]*** Distance -2.697 -0.945 -1.748 -2.609 -0.914 -1.687 -2.727 -0.951 -1.762 -2.052 -1.16 -0.839 [-15.99]***[-14.20]***[-12.80]***[-14.74]***[-13.34]***[-11.51]***[-13.04]***[-11.94]***[-10.72]***[-5.04]*** [-6.89]*** [-2.46]** Remoteness-Trade -0.14 -0.026 -0.149 -0.117 -0.018 -0.14 -1.763 0.676 -2.515 [-2.12]** [-1.07] [-2.44]** [-1.67]* [-0.70] [-2.18]** [-2.23]** [2.06]** [-3.79]*** Tariff 0.19 -0.118 0.286 0.314 -0.035 0.336 0.271 -0.203 0.372 [1.83]* [-3.01]*** [3.16]*** [2.42]** [-0.71] [2.99]*** [1.29] [-2.26]** [1.97]** FDI 0.227 0.05 0.204 [5.45]*** [3.21]*** [5.50]*** GDPP-H 0.839 0.475 0.397 1.096 0.553 0.563 [7.27]*** [10.91]*** [3.99]*** [6.98]*** [8.32]*** [4.09]*** GDPP-F 0.499 0.3 0.177 0.265 0.251 -0.075 [3.50]*** [5.55]*** [1.51] [0.99] [2.23]** [-0.32] Air_trans 0.131 0.009 0.127 [2.45]** [0.38] [2.70]*** Road_trans 0.189 0.061 0.151 [2.90]*** [2.16]** [2.56]** Rail_trans 0.471 0.281 0.185 [5.28]*** [7.63]*** [2.49]** _cons -6.839 -10.528 1.824 -13.324 -10.917 -3.562 17.938 1.868 15.673 22.766 -3.131 27.063 [-2.83]*** [-11.34]***[0.89] [-4.49]*** [-9.63]*** [-1.41] [7.13]*** [1.96]* [7.58]*** [4.04]*** [-1.33] [5.60]*** R-squared 0.42 0.40 0.27 0.42 0.42 0.28 0.23 0.19 0.17 0.32 0.37 0.17 N 3799 3799 3799 2938 2938 2938 2812 2812 2812 1265 1265 1265 * p<0.1, ** p<0.05, *** p<0.01 Interpretation • We can explain the export of Central Asian countreis through the simple gravity model • Market size: GDP, GDPP – They export relatively larger market and higher income countries. • Economic Openness:Remoteness, FDI, Tariff – They export to the relatively higher economic openness – Some countries which have neighbor countries with a higher volume of trade (low remoteness) and accept FDI from many other countries have higher economic openness • Trade costs:Distance, Infrastructure – They export to the countries with an improvement of infrastructure. – Distance is still important factors for trade growth, according to the Coulibaly & Fontagné (2004)model. Export share by market Export share by market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% East Asia EU4 USA Russia 1996 17% 16% 5% 62% 2007 28% 42% 6% 24% Source: UN Comtrade and WDI Note:Those share are Based on author’s calculation. 5.Conclusions and future work • Our studies show that the Central Asian countries have stronger comparative advantages for primary goods, but comparing to East Asian countries, they still face lower international competition. • The gravity model can simply explain the trade diversification for the Central Asian countries. • We clarify the negative relations between export and trade costs, especially infrastructure. So, it is important to decrease trade costs (ex. improve infrastructure) in order to trade growth and economic development. • For the future work, we will measure and estimate some determinants of trade costs in order to lead the some implications to decrease trade costs and to achieve economic development for the related countries. 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