Distance and Regionalization of Trade for Low-Income Countries

50 Pages Posted: 20 Apr 2016

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

Date Written: February 1, 2010

Abstract

The "distance effect" measuring the elasticity of trade flows to distance has been rising since the early 1970s in a host of studies based on the gravity model, leading observers to call it the "distance puzzle" . This paper reviews the evidence and explanations. Using an extensive data set of 124 countries over the period 1970-2005, the authors confirm the existence of this puzzle and identify that it only applies to poor countries (the bottom third in per capita income terms in the sample -- i.e., the low-income countries according to the World Bank classification, 2006). The analysis shows that this group has intensified trade with closer partners and has 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, the authors estimate that low-income countries exhibit a significant rising distance effect on their trade, around 18 percent between 1970 and 2006. There is no more distance "puzzle" for trade within richer countries (the top third in per capita income terms in the sample). The paper disposes of several previous explanations of the puzzle, and notes that this regionalization could well be a reflection of increased integration of this group of countries in the world economy or greater marginalization.

Keywords: Transport Economics Policy & Planning, Economic Theory & Research, Free Trade, Common Carriers Industry, Emerging Markets

Suggested Citation

Carrere, Celine and de Melo, Jaime and Wilson, John S., Distance and Regionalization of Trade for Low-Income Countries (February 1, 2010). World Bank Policy Research Working Paper No. 5214, Available at SSRN: https://ssrn.com/abstract=1559732

Celine Carrere (Contact Author)

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

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

Jaime De Melo

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 ( email )

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

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