Trade similarity across the Mediterranean Basin

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Trade similarity across the Mediterranean Basin
Luca De Benedictis and Lucia Tajoli
Politecnico di Milano
Università di Macerata
Bridging the gap the role of trade and FDI in
the Mediterranean Naples, 9 June 2006
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Research questions
Luca De Benedictis Trade and other openness
indicators often positively associated to
growth, but criticisms on the robustness of the
evidence, on the indicators used, and on the lack
of a clear underlying mechanism linking the two
variables.
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Research questions
Does it make a difference to change the export
pattern?
Does it matter to become more or less similar to
a given country or group of countries?
Does it matter in which way (in terms of forms of
integration and in terms of sectoral composition)
a country is open (and not only how much it is
open)?
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Relevance of these issues for the Mediterranean
countries
Relatively high GDP growth rates for the MED
countries, but little or no catching-up in terms
of GDP per capita
Many political and institutional problems
hampering growth and integration
Difficulties in running acceptable growth
regressions for these countries
Are trade and export composition related to these
problems ? Can an export-led growth model be
achieved?
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Research questions
Aim of this work -verify if export structures
in the process of economic integration with the
EU has become more similar to the EU export
structure - verify if the change in the export
structure is associated with other forms
(non-traditional trade) of economic
integration - verify if export structures
capture characteristics of the development process

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The EU - Med partnership
A group of countries with very strong ties with
the EU Initial agreements very early, in the late
1978 EU is the main trade partner for the MED
group, but not for all
Growth of Med economic integration with the EU -
and growth of their trade in general - somehow
disappointing
Barcellona Agreement as a compensation for the
trade diversion?
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EU trade with the CEECs and with the MEDA group
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Data and sources for this empirical analysis
Countries Algeria, Egypt, Israel, Jordan,
Lebanon, Morocco, Palestinian territories, Syria,
Tunisia, Turkey Benchmark EU15 Trade data
exports toward the EU market in 97 sectors from
Comext, Eurostat database Time period
1990-2003
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Characteristics of the export composition of the
MED
Three groups of countries in this sample
Mono-export (fuel) countries Algeria and Syria
Diversified but not changing
Diversified and changing
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Measuring export structure and similarity
Export structure the vector of shares of each
sector on total exports, x1j, xnj.
Self-similarity taking a base year, we observe
how a country export structure changed in time.
The change is measured by the variation of the
correlation or distance indices.
EU-Similarity we compare a countrys export
structure with the one of the EU, using different
indices. We compare countrys export structure
to the EU benchmark over time to observe whether
differences narrow or widen.
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Why similarity in trade structure should matter?
Some possible channels
Productivity Selection (Melitz, 2003) Knowledge
spillovers (Keller, 2002) Factor composition
(Slaughter, 1997 Ventura, 1997) gt proxy used
high-tech intensity Investments FDI Outward
Processing Trade gt proxy used FDI
OPT Adaptation to international demand The
Linder hypothesis (Linder, 1961 Markusen,
1986) gt proxy used growth in demand Stability I
nternational risk sharing (Acemoglu and
Zilibotti, 1997) Optimal currency area
arguments gt proxy used efficiency of financial
system and institutions


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Methodological points
Similarity in Trade Structures
gt (1 Distance)
Similarity
j country k benchmark x sectoral export
share i sector Strong similarity ? 1 Weak
similarity ? 0
countries
sectors
Export sectoral shares
Measuring similarity in trade structures both
with respect to itself at the beginning of the
period (SELF-SIMILARITY), and with respect to the
EU15 (EU-SIMILARITY)
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Methodological points
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A comparison with another group The EU- and
SELF- similarity Plot for the CEECs
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How can economic integration influence the
observed changes?
On the supply side through FDI and other forms
of delocalization of production, production
sharing agreements between the EU and the MEDA
can affect the share of exports in important
sectors
On the demand side opening of the EU market can
influence the export structure of the MEDA to
accomodate the European demand
Previous result for the CEECs confirm the
relevance of these effects changes in the export
structure of all CEECs is driven by changes in a
few sectors highly involved in processing trade,
and growth in EU demand also plays a role. But
for the CEECs international fragmentation of
production can foster both convergence and
divergence of trade structures
Are these effects at work for the Mediterranean
countries? Has integration gone far enough to
produce them?
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Exports toward the EU market total and OPT
trade Correlation for Tunisia 0.95
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Exports toward the EU market total and OPT
trade Correlation for Israel 0.39
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Exports toward the EU market total and OPT
trade Correlation for Turkey 0.40
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Some regression results
Export structure correlated to export volumes
Changes in export composition correlated with
increase in EU similarity
Changes in export composition correlated with
inward FDI
Changes in export composition correlated with OPT
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Similarity in export composition and trade
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Similarity in export composition and trade