Regional integration and natural resources : who benefits ? evidence from MENA

February 22, 2012

By Carrere Celine, Gourdon Julien, Olarreaga Marcelo


This paper builds on theoretical predictions that show that gains from regional integration are unevenly distributed between resource rich and poor countries. It explores the effects of different integration schemes in the Middle East and North Africa. The results suggest that within the Pan Arab Free Trade Agreement, there is significant trade creation for resource poor countries associated with regional integration, and no evidence of trade diversion. In resource rich countries, however, there is evidence of pure trade diversion in both resource-rich/labor-abundant countries and resource-rich/labor-importing countries. This underscores the idea that regional integration can help to spread the benefits of unevenly distributed resource wealth among the region’s economies.


This paper provides a useful application of a recent model by Venables (2011) about the trade effects of integration among resource-rich and resource-poor countries.  When comparing the trade effect of different trade integration agreements, namely in Middle East and North Africa, the authors show that most of them are trade creating, with the only exception of the Pan-Arab Free Trade Agreement. How can this affect the strategies of both resource-rich and resource-poor countries when choosing their partners in trade agreeements?



Product durability and trade volatility

January 24, 2012

By Dimitra Petropoulou and Kwok Tong Soo

One of the main causes behind the trade collapse of 2008–09 was a significant fall in the demand for durable goods. This paper develops a small country, overlapping generations model of international trade in which goods durability gives rise to a more than proportional fall in trade volumes, as observed in 2008–09. The model has three goods—two durable, traded goods and one nondurable, nontraded good and two factors of production. The durability of goods affects consumers’ lifetime wealth and their optimal consumption bundle across goods and time periods. A uniform productivity shock reduces consumers’ lifetime wealth inducing a re-optimisation away from durables. This gives rise to a more than proportional effect on international trade, provided the nontraded sector is sufficiently capital intensive. The elasticity of trade flows to GDP is found to be increasing in both the degree of durability and the size of the shock.> ; Thus the model provides microfoundations for the asymmetric shock to the demand for durable goods observed in recessions and clarifies the link between this endogenous shift in preferences and international trade flows. It also explains the observation that deeper downturns are associated with a higher elasticity of trade to GDP. Furthermore, the greater the degree of durability of traded goods, the larger is the share of domestically produced goods in consumption, for plausible factor intensities. This provides an alternative explanation for the home bias in consumption, and hence another explanation for Trefler’s “missing trade.”

This paper provides interesting microfoundations to the collapse of world trade during the recent recession, with trade contracting much more than GDP. Building on the assumption (strongly supported by recent evidence) that durables account for a significant share of traded goods, the model develops a theoretical  link between a fall in GDP – which reduces consumers’ expected lifetime wealth, and therefore their demand for durables vs. non durables – and a fall in trade flows.

Institutional Quality and FDI: An Analytical Approach

January 20, 2012

By Rodolphe Desbordes & Julia Darby & Ian Wooton


We ask whetherMNEs’ experience of institutional quality and political risk within their “home” business environments influences their decisions to enter a given country. We set out an explicit theoretical model that allows for the possibility that firms from South source countries may, by virtue of their experience with poor institutional quality, derive a competitive advantage over firms from North countries with respect to investing in destinations in the South. We show that the experience gained by such MNEs of poorer institutional environments may result in their being more prepared to invest in other countries with correspondingly weak institutions.


In the current search for a theory on FDI by MNEs from the South, this paper offers a model that aims to explain some of the paradoxes that have emerged from the (very few) empirical studies on the foreign location choices of these firms. One of the most puzzling results is that MNEs from the South seem to be attracted to host countries with poor institutional environments, in contrast with the widespread evidence that ‘good’ institutions attract FDI.  The authors model the present value of an FDI as depending  on (1) an ‘experience effect’ that reduces the risk of FDI in relatively risky environments for countries having past experience in a similar environment at home; (2) a ‘demonstration effect’ due to previous FDI from other firms from the same home country in the same host economy (something which resembles what has been previously called a ‘national’ agglomeration effect?).

Agglomeration premium and trading activities of firms

March 12, 2010

By Gabor Bekes and Peter Harasztosi

Firms may benefit from proximity to each other due to the existence of several externalities. The productivity premia of firms located in agglomerated regions an be attributed to savings and gains from external economies. However, the capacity to absorb information may depend on activities of the firm, such as involvement in international trade. Importers, exporters and two-way traders are likely to employ a different bundle of resources and be organised differently so that they would appreciate inputs and information from other firms in a different fashion and intensity. Getting a better understanding of such external economies by looking at various types of firms is the focus of present paper. Using Hungarian manufacturing data from 1992-2003, we confirm that firms perform better in agglomerated areas and show that traders gain more in terms of productivity than non-traders when agglomeration rises. Firms that are stable participants of international trade gain 16 % in terms of total factor productivity growth as agglomeration doubles while non-traders may not benefit from agglomeration at all. Results also suggest that traders’ productivity premium is most apparent in urbanised economies.

This paper confirms that the sources of productivity differences between exporters and non exporters do not arise  just from firms’ internal characteristics, but also from the geography of economic activities.

Do trade preferential agreements enhance the exports of developing countries? Evidence from the EU GSP

February 4, 2010

By Aiello, Francesco and Demaria, Federica

The EU grants preferential access to its imports from developing countries under several trade agreements. The widest arrangement, in terms of country and product coverage, is the Generalised System of Preferences (GSP) through which, since 1971, virtually all developing countries have received preferential treatment when exporting to world markets. This paper evaluates the impact of GSP in enhancing developing countries’ exports to EU markets. It is based on the estimation of a gravity model for a sample of 769 products exported from 169 countries to EU over the period 2001-2004. While, from an econometric point of view, the estimation methods take into account unobservable country heterogeneity as well as the potential selection bias which zero-trade values pose, the empirical setting considers an explicit measure of trade preferences, the margin of preferences. The analysis offers new empirical evidence that the impact of GSP on developing countries’ agricultural exports to the EU is positive.

This paper provides a confirmation that increased market access does stimulate exports.  As increased export capacity is an important driver of per capita income (as in Mayer (2008)), preferential trade agreements are of vital importance for developing countries. How does this relate to the literature on local export spillovers? Do increases agricultural exports impact positively on other exports?

Trade, Firm Structure, and Migration of Talent

November 17, 2009

By Maroula Khraiche

Throughout economic history there have been episodes in which the liberalization of trade has been accompanied by a positive flow of migrants. Such phenomena are notable because they contradict the basic Heckscher-Ohlin conclusion that trade and labor mobility are substitutes. Also notable is the fact that migrants to the U.S. have been largely skilled rather than unskilled. This paper links these two phenomena by pointing out the simple fact that increased trade can involve different types of firm structures and different types of goods being traded, which in turn have different effects on skilled and unskilled labor. The interaction between different frictions that impact labor movements, specifically the interaction between capital adjustment costs and trade costs, has a significant effect on the gap between the returns to labor in the South and North. Although the decrease in trade costs and increase in trade dampens labor movements, the existence of asymmetric capital adjustment costs in the North and South increases it. To show these results formally, this paper calibrates and solves a two-country, two-sector model of trade and migration, in which countries differ in skill endowments and capital adjustment costs and sectors differ in structures and capital intensities. Empirical analysis is then provided, with results supporting the main qualitative implications of the model.

This paper expands the traditional analysis of the link between migration and trade by including the structure of trading firms and the types of goods traded. In the absence of capital-adjustment costs, an increase in the trade volume of labor-intensive goods resulting from decreased trade costs leads to an increase in skilled migration and a decrease in the migration of the unskilled. On the other hand, an increase in the trade volume of capital-intensive goods decreases skill migration. But when asymmetric adjustment cost of capital is introduced in the two countries, a decrease in trade costs in the capital-intensive sector leads to an increase in skill migration. Therefore, skill follows capital where it is more abundant. This is an important step in understanding the observed link between movements of goods and movements of factors beyond the basic Heckscher-Ohlin conclusions that trade and labor mobility are substitutes.

The NEP-INT Blog

November 15, 2009

This blog is an experiment to explore the feasibility of scientific discussion on an Economics blog. NEP-INT disseminates every week new working papers in the field of International Trade. Among them, the NEP-INT editor selects one to be discussed. Everyone is invited to comment. Try to stay civil, or your comments will be removed. And encourage others to read or join in the discussion.