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Fourth UNCTAD Virtual Institute Meeting

Regionalism as industrial policy in developing countries by Pedro Moncarz (Universidad de Córdoba) Marcelo Olarrega (University of Geneva) Marcel Vaillant (Universidad de la República). Fourth UNCTAD Virtual Institute Meeting

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Fourth UNCTAD Virtual Institute Meeting

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  1. Regionalism as industrial policy in developing countriesbyPedro Moncarz (Universidad de Córdoba)Marcelo Olarrega (University of Geneva)Marcel Vaillant (Universidad de la República) Fourth UNCTAD Virtual Institute Meeting Joint research project on regional integration and cooperation in Latin America Geneva May 4-6 2009

  2. Organization of the presentation • Some stylized facts and main variable definitions • Theoretical ideas • Model to estimate • Results • Conclusions

  3. STYLIZED FACTS AND MAIN VARIABLES DEFINITIONS

  4. Why to study Brazil’s PTAs? • A lasting policy of ISI • It is the largest economy in the region • By the end of ‘80s starts a policy of trade liberalization: • Unilateral trade reforms, increasing multilateral discipline, and new PTAs. • PTAs in the class of FTAs (Table 1) • Few • South-South • All with regional neighbors and with different levels of liberalization. Deeper within MERCOSUR (Table 2) • Export performance • 22% of exports are oriented to preferential markets (Table 3) • Argentina more than 40% of preferential exports. • Also, Brazil is a relevant destination for MERCOSUR partners exports (35%-50% of preferential exports)

  5. Variables definitionsProduct “g” and country “c” exports value • Product “g” value • Country “c” exports value

  6. Table 4 Value for the basket of goods exported by each country: 2003-2007 a) Average 2003-2007 (2000 constant U$S and ratios) b) Proportional change 2007/2003 (%)

  7. Trade Intensity (ti) in product “g” to market “p”:differences in Export Orientation (eo) • eo in product g to partner p: • eo in product g to ROW (non preferential markets): • ti of country c in product g to market p:

  8. Revealed Comparative Advantage • RCA index: Note: we correct the numerator by preferential trade, we do not have data to correct denominator

  9. Margin of Preference • tg,p,mfn: is most favored nation tariff by partner p on product g; • tg,p,c: is preferential tariff by partner p to country c in product g.

  10. THEORETICAL IDEAS

  11. Cooper and Massel (1965) • Policy makers preference for industrialization • CU could help to achieve this objective • Regional market greater than national market • Less tariff protection means a larger production scale: less cost inefficiency • Trade diversion and the industrialization objective • Asymmetries among partners

  12. Venables (2003 and 2005) • Traditional factor abundance trade model. Different types of countries considering the level of capital abundance • Interesting for the case of South-South PTAs. • Poorest country are the one that bear the cost of trade diversion, which magnifies initial income disparities • Asymmetries among partners in a PTA • Assumes 3 countries (A,B, C) • Order countries using the relative capital abundance (A<B<C). • The results of the creation of PTAs are different depending on the type of countries that belong to it. • Asymmetries among partners • Country A creates a PTA with C: A benefits from a PTA with C. It imports the more capital intensive goods (could be manufactures) from C. • Country A creates a PTA with B: now A imports the capital intensive goods from B, and bears the cost of trade diversion

  13. Grossman and Helpman (1995) • The relevant phenomenon to be explained is the list of goods excluded for the FTA • Political Economy Model- lobby groups and political contributions, in a standard specific factors trade model • Trade creating goods are going to be excluded- domestic production adjustment is greater. • Trade diverting sectors are going to be included in the liberalization because it does not hurt domestic production • A FTA means the exchange of exports by inefficient producers benefiting from the preferential access • Trade in the FTA will to be characterized by goods in which partners has a comparative disadvantage in the global market.

  14. MODEL TO ESTIMATE

  15. Econometric model (for exporter country c) • Effect of preferences by partner “p” on trade intensity of “c” to “p”

  16. Isoquant in the space RCA and PRODY

  17. RESULTS

  18. Direct effects (data appendix, results) • RCA (b1): negative. More trade intensity with less RCA when controlling by preference. Two interpretations: • Other motives besides preferences. Linder hypothesis and preferences. • RCA could be an approximation to NTBs in a G&H world. • PRODY (b2): negative or not significant. More product sophistication does not imply more trade intensity after controlling for preference. • Pref (b3): pattern is not stable across the different estimations (mostly not significant)

  19. Argentina Brazil Paraguay Uruguay + ns + ns - ns - ns b PRODY*Pref ( ) 23 + ns - - - ns b RCA*PRODY*Pref ( ) 123 C&M (1965) Hypothesis (results) • We expect b23>0 and b123<0. • The marginal effect of preference on trade intensity (MEPTI) is greater as the level sophistication increases (b23>0) • For a certain level of product sophistication, the MEPTI is greater as the product has more comparative disadvantage (b123<0)

  20. Venables (2003 and 2005) (results) • Asymmetries in the MEPTI among partners: • Function of countries’ global comparative advantages: • Pattern 1 for Paraguay and Uruguay • Pattern 2 (no so clear) for Brazil and Argentina

  21. Argentina Brazil Paraguay Uruguay + ns - - ns - b RCA ( ) 1 - ns + + ns + b RCA*Pref ( ) 13 G&H (1995) (results) • RCA (b1) negative: ………………………………………. • RCA*Pref (b13) negative: less trade intensity with more RCA

  22. The empirical isoquant in the RCA,PRODY space

  23. Effect of preferences on trade intensity according to RCA and PRODY Distribution of export shares values to each market(% and millions of US)

  24. Effect of preferences on trade intensity according to RCA and PRODY Distribution of export shares values to each market(% and millions of US)

  25. CONCLUSIONS

  26. Brazil trade intensity on regional markets is greater in goods with high PRODY and LOW RCA • In non preferential markets, Brazil exports concentrate in goods with Low PRODY and High RCA. • At the other extreme, Paraguay exports the same goods to regional and non regional markets (Low PRODY and high RCA) • Argentina and Uruguay in the middle • There is evidence that supports, with different degrees, the three theoretical explanations. • C&M- Industrializations objective and PTA for Brazil, mechanism to change pattern of exports; • Strong differences in outcomes across partners, in line with Venables predictions; • Trade intensity in regional markets is greater when comparative disadvantages is large (trade diversion in regional market as G&H predict)

  27. Table 1 Brazilian PTAs in force with third countries (1991-2008)

  28. Table 2 Brazil: level of trade liberalization for each of the PTAs in the class of the FTA (%) Year 2006

  29. Table 3 (OLD) Export performance by MERCOSUR countries 2003-2007 (% and millions of US)

  30. Data appendix

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