The Distance Effect and the Regionalization of the Trade of Low-Income Countries

50 Pages Posted: 7 Oct 2009

See all articles by Celine Carrere

Celine Carrere

Université d'Auvergne - Clermont 1 - CERDI

Jaime de Melo

University of Geneva - Department of Political Economics; Centre for Economic Policy Research (CEPR); World Bank

John S. Wilson

World Bank - Development Research Group (DECRG)

Date Written: September 2009

Abstract

The 'distance effect' measuring the elasticity of trade flows to distance has been to be rising since the early 1970s in a host of studies based on the gravity model, leading observers to call it the 'distance puzzle'. We review the evidence and explanations. Using an extensive data set of 124 countries over the period 1970-2005, we confirm the existence of this puzzle and identify that it only applies to poor countries (the bottom third in per capita income terms in our sample - i.e. the low-income countries according to the World Bank classification, 2006). We show that this group has intensified trade with closer partners and have chosen new partners that are closer than existing partners, leading to a regionalization of their trade at both extensive and intensive margins (regionalization of trade is absent for the other countries). Combining several methods on cross-section and panel estimates of the gravity equation, we estimate that low-income countries exhibit a significant rising distance effect on their trade around 18% between 1970 and 2006 while there is no more distance 'puzzle' for trade within richer countries (the top third in per capita income terms in our sample). We dispose of several previous explanations of the puzzle, and note that this regionalization could well be a reflection of both increased integration of this group of countries in the world economy or a greater marginalization.

Keywords: Distance Effect, Gravity Model, International Trade

JEL Classification: F10, F40

Suggested Citation

Carrere, Celine and de Melo, Jaime and Wilson, John S., The Distance Effect and the Regionalization of the Trade of Low-Income Countries (September 2009). CEPR Discussion Paper No. DP7458. Available at SSRN: https://ssrn.com/abstract=1484491

Celine Carrere

Université d'Auvergne - Clermont 1 - CERDI ( email )

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

Jaime De Melo (Contact Author)

University of Geneva - Department of Political Economics ( email )

40, boulevard du Pont-d'Arve
Geneva 4, CH-1211
Switzerland
+41 22 705 8273 (Phone)
+41 22 705 8293 (Fax)

HOME PAGE: http://www.unige.ch/ses/ecopo/demelo/Jaime.html

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

John S. Wilson

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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