Does Disaggregated Political Risk act as a Deterrent to Bilateral Trade Flow in the Globe? A Three Dimensional Panel Framework
Posted: 1 Sep 2021
Date Written: September 23, 2020
Abstract
Political risk or insecurity have been perceived as major deterrents to the trade flow all around the globe. Using a global dataset of countries, drawn from both OECD and Non-OECD lists, this paper examines the role of twelve different types of political risks or insecurities which act as a deterrent to trade flow across the border in a three dimensional gravity framework. Using four different kinds of country groupings: all countries, both OECD, OECD with Non-OECD, and both Non-OECD in a Panel OLS, Panel EGLS, and TSLS set-up, we have found that the political risk or insecurity actually significantly lowers trade flow. The effect of political risk on the bilateral trade flow ranges from somewhere between 2% to 24% of the overall flow, depending on the type of political risk and the type of model that we are estimating. The magnitude of the effect of the political risk coefficients may be considered to be a substantial deterrent to trade. The result, however, still holds even though we control for standard Gravity variables such as distance, border, common language, common currency, colonial relationship, FTA membership, GATT arrangement, land-locked dummy, island dummy, and others. Political risk or insecurity which includes Government Instability, Socio-Economic Condition, Investment Profile, Internal Conflict, External Conflict, Corruption, Military in Politics, Religious tension, Law and Order, Ethnic Tension, Democratic Accountability, Bureaucracy Quality, and an Overall Political Index which is composed of all the twelve indices. All the thirteen indices have been found to have tremendous but differing degrees of impact on trade flow; with the impact of Bureaucracy Quality being the highest of them all. Covering 139 domestic countries with their applicable partner countries from 1984 to 2015 (Unbalanced Panel; Observations: 2, 24,487), this study is one of the most comprehensive ones in terms of coverage. The paper suggests that policymakers and politicians should resolve their disputes through constructive dialogue across the border and improve upon the bureaucracy quality for a smooth flow of goods and services border wide.
Keywords: Trade flow; gravity equation; political risk; disaggregated political risk; ICRG; Panel Data; bilateral trade flow model; insecurity in trade
JEL Classification: F1
Suggested Citation: Suggested Citation