Regionalism as industrial policy in developing countries

byPedro 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

Organization of the presentation

• Some stylized facts and main variable definitions

• Theoretical ideas

• Model to estimate

• Results

• Conclusions

STYLIZED FACTS AND MAIN VARIABLES DEFINITIONS

Why to study Brazil’s PTAs?• It is the largest economy in the region• A lasting policy of ISI

• 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)

Variables definitions

Product “g” and country “c” exports value

• Product “g” value

,

.,

,

.,

g c

cg c

g cc

cc

xx

PRODY GDPpcx

x

• Country “c” exports value

,

.,

g cc g

g c

xEXPY PRODY

x

Table 4Value for the basket of goods exported by each

country: 2003-2007

Destiny / Export country

Argentina Brazil Paraguay Uruguay

World 8,471 9,615 4,955 8,415

Argentina 1.4 1.0 1.4

Brazil 1.4 1.1 1.1

Paraguay 1.2 1.1 1.2

Uruguay 1.4 1.2 0.8

Rest LAIA 1.2 1.3 1.3 1.2

ROW 0.8 0.9 0.9 0.9

b) Proportional change 2007/2003 (%)

Argentina Brazil Paraguay Uruguay

World 4.3 2.3 10.3 1.0

Argentina -0.2 -27.6 -6.2

Brazil 4.3 39.1 10.9

Paraguay 11.8 -5.6 -5.0

Uruguay 8.4 0.0 0.5

Rest LAIA 9.7 -0.9 -6.1 1.2

ROW -0.9 0.5 1.1 -3.4

a) Average 2003-2007 (2000 constant U$S and ratios)

Trade Intensity (ti) in product “g” to market “p”:differences in Export Orientation (eo)

• eo in product g to partner p:

, ,, ,

., ,

g c pg c p

c p

xeo

x

• eo in product g to ROW (non preferential markets):

, ,, ,

., , ,

g c rowg c row

c r ow

xeo

x

• ti of country c in product g to market p:

, , , , , ,g c p g c p g c rowti eo eo

Revealed Comparative Advantage

• RCA index:

, ,

., ,,

,.

.,.

g c row

c rowg c

g

xx

RCAx

x

Note: we correct the numerator by preferential trade, we do not have data to correct denominator

Margin of Preference

, , , , , ,g p c g p mfn g p cPref t t

• 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.

THEORETICAL IDEAS

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

Venables (2003 and 2005)

• Asymmetries among partners in a PTA – 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 • Assumes 3 countries (A,B, C)

• Asymmetries among partners

– 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.

– 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

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.

MODEL TO ESTIMATE

• Econometric model (for exporter country c)

, , , 1 , , 2 , 3 , , ,

12 , , , 13 , , , , , 23 , , , ,

123 , , , , , , , ,

g c p t c g t g t g c p t

g c t g t g c t g c p t g t g c p t

g c t g t g c p t g p t g p t

ti RCA PRODY Pref

RCA PRODY RCA Pref PRODY Pref

RCA PRODY Pref

, , ,3 13 , , 23 , 123 , , ,

, , ,

g c p tc g t g t c g t g t

g c p t

tiRCA PRODY RCA PRODY

Pref

• Effect of preferences by partner “p” on trade intensity of “c” to “p”

• Isoquant in the space RCA and PRODY

, , , 3 23 ,, ,

, , , 13 123 ,

0g c p t g tg c t

c g p t g t

ti PRODYRCA

Pref PRODY

RCA

, , ,

, , ,

0g c p t

g c p t

ti

Pref

PRODY

RCA=1

PRODY=PRODYM

(1) (2)

(3)(4)

(5) (6)

RESULTS

Direct effects (data appendix, results)

• RCA (1): 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 (2): negative or not significant. More product sophistication

does not imply more trade intensity after controlling for preference.

• Pref (3): pattern is not stable across the different estimations (mostly not significant)

C&M (1965) Hypothesis (results)

• We expect 23>0 and 23<0.

– The marginal effect of preference on trade intensity (MEPTI) is greater as the level sophistication increases (23>0)

– For a certain level of product sophistication, the MEPTI is greater as the product has more comparative disadvantage (23<0)

Argentina Brazil Paraguay Uruguay

PRODY*Pref ( 23 ) + ns + ns - ns - ns

RCA*PRODY*Pref ( 123 ) + ns - - ns -

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

G&H (1995) (results)

• RCA (1) negative: ……………………………………….

• RCA*Pref (13) negative: less trade intensity with more RCA

Argentina Brazil Paraguay Uruguay

RCA ( 1 ) + ns - - ns -

RCA*Pref ( 13 ) - ns + + ns +

The empirical isoquant in the RCA,PRODY space

Argentina Brazil

Paraguay Uruguay

Effect of preferences on trade intensity according to RCA and PRODY Distribution of export shares values to each market

(% and millions of US)Argentina

Low High Low High

Negative 1 0 3 0 250Positive 13 30 43 10 5,782

Negative 1 0 5 0 70Positive 38 29 23 4 1,072

Negative 0 0 34 0 6,469Positive 4 3 53 5 12,412

Exports to Brazil

Exports to Paraguay and Uruguay

Exports to Row

Export average 2003-2007 (: USD)

RCA (*)

No RCA RCA

PRODY (**) PRODY (**)pref

ti

Brazil

Low High Low High

Negative 1 0 0 0 45Positive 20 48 17 15 8,652

Negative 2 0 0 0 26Positive 38 30 19 11 1,677

Negative 0 0 0 0 2Positive 7 10 63 20 54,040

Exports to Argentina

Exports to Paraguay and Uruguay

Exports to Row

Export average 2003-2007 (: USD)

RCA (*)

No RCA RCA

PRODY (**) PRODY (**)pref

ti

Effect of preferences on trade intensity according to RCA and PRODY Distribution of export shares values to each market

(% and millions of US)Paraguay

Low High Low High

Negative 0 0 0 0 1Positive 14 0 85 1 295

Negative 4 0 0 0 17Positive 9 0 87 0 403

Negative 0 0 0 0 0Positive 0 0 99 1 373

a) Exports to Brazil

b) Exports to Argentina and Uruguay

c) Exports to Row

Export average 2003-2007 (: USD)

RCA (*)

No RCA RCA

PRODY (**) PRODY (**)pref

ti

Uruguay

Low High Low High

Negative 1 3 0 6 44Positive 20 13 55 2 372

Negative 2 7 0 4 28Positive 22 35 26 3 173

Negative 0 1 0 7 111Positive 1 1 91 0 1,272

Exports to Brazil

Exports to Argentina and Paraguay

Exports to Row

Export average 2003-2007 (: USD)

RCA (*)

No RCA RCA

PRODY (**) PRODY (**)pref

ti

CONCLUSIONS

• 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)

Table 1Brazilian PTAs in force with third countries

(1991-2008)

PARTNERS YEAR

Argentina, Paraguay and Uruguay

(ACEa), 18)1991 Plurilateral

FTA (2001) and CU (in construction)

Chile (ACE, 35) 1996Common with MECOSUR

countriesFTA in goods

Bolivia 1997Common with MERCOSUR

countriesFTA in goods

México (ACE 53 and 55) 2003 BilateralTrade rules and automotive

sector

Cuba 2000 Bilateral Partial preference

Peru (ACE, 58) 2005Common with MERCOSUR but

different bilateral preferenceFTA in goods (2014)

Ecuador, Colombia and Venezuela (ACE, 59)

2005Common with MERCOSUR but

different bilateral preferenceFTA in goods (2018)

TYPE OF AGREEMENTS

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

Year 2006

Obtained Given Obtained Given Obtained Given Obtained Given

Argentina 18 93 93 80 90 10.7 9.4 62 76Paraguay 18 93 93 80 98 8.8 9.1 72 97Uruguay 18 93 93 80 95 9.3 11.4 70 92Chile 35 98 98 88 93 6.2 7.1 89 83Bolivia 36 91 97 69 93 8.7 5.1 65 83Colombia 59 25 21 18 53 14.3 8.0 9 14Ecuador 59 21 21 14 92 11.1 5.5 7 75Peru 58 10 19 5 85 9.8 6.3 2 69Venezuela 59 11 16 12 89 12.9 1.6 8 27

Market access

% free market access (e)

Own export weigted partner

tariff (d)Partner

/liberalizationFTA (a)

% items free trade (b)

% export of the in Free Trade (c)

Table 3 (OLD)Export performance by MERCOSUR countries 2003-2007

(% and millions of US)

Exporting country

Growth rate

Structure Growth

rate Structure

Growth rate

Structure Growth

rate Structure

Destiny 2003-2007 2007 2003-2007 2007 2003-2007 2007 2003-2007 2007Argentina 32.7 9.1 72.9 19.8 29.9 9.8Brazil 22.5 19.1 7.2 20.0 11.5 16.2Paraguay 15.0 1.4 23.0 1.0 12.6 1.7Uruguay 22.7 2.2 33.1 0.8 2.5 9.5Rest of LAIA 13.1 15.8 26.2 10.6 63.2 16.0 30.8 11.7ROW 16.5 61.5 19.7 78.5 24.6 34.7 19.3 60.5TOTAL 17.0 100.0 21.4 100.0 23.8 100.0 19.6 100.0TOTAL (millions)

54,860 156,364 2,782 4,496

Argentina Brazil Paraguay Uruguay

Argentina Brazil Paraguay UruguayRCA ( 1) 0.000994 -0.209652 -12.496795 -5.764085 robust SE (a) [0.095237] [0.107155]* [6.794021]* [1.744112]*** clustered by Partner (b) [0.083159] [0.033120]** [10.051885] [2.753630] clustered by year (c) [0.060218] [0.011411]*** [4.943142]* [1.313524]** clustered by product (d) [0.120162] [0.099461]** [10.347846] [2.723350]**PRODY ( 2) -0.137505 0.002801 -2.95529 1.764397 (a) [0.089488] [0.031731] [3.090521] [0.778426]** (b) [0.083271] [0.039744] [4.709849] [1.337690] (c) [0.089004] [0.018012] [3.566366] [0.517335]** (d) [0.089697] [0.053001] [3.834796] [1.195632]Pref ( 3) -0.073717 0.001066 0.753199 1.113188 (a) [0.040125]* [0.017060] [1.653007] [0.500625]** (b) [0.044630] [0.031378] [2.825774] [0.822968] (c) [0.034933] [0.012988] [1.765114] [0.298926]** (d) [0.053769] [0.031328] [1.803428] [0.854052]RCA*PRODY ( 12) -0.001975 0.021078 1.376304 0.613433 (a) [0.010031] [0.011871]* [0.784369]* [0.184359]*** (b) [0.008443] [0.003696]** [1.179557] [0.282893] (c) [0.006346] [0.001275]*** [0.550129]* [0.147175]** (d) [0.013022] [0.010486]** [1.191855] [0.287306]**RCA*Pref ( 13) -0.007613 0.012768 0.871411 0.314501 (a) [0.006330] [0.005449]** [0.470872]* [0.101259]*** (b) [0.005819] [0.002114]** [0.690824] [0.150419] (c) [0.003722] [0.001014]*** [0.313337]** [0.088374]** (d) [0.009847] [0.006436]** [0.654569] [0.179383]*PRODY*Pref ( 23) 0.008902 0.000929 -0.056546 -0.116865 (a) [0.004272]** [0.001849] [0.186550] [0.052132]** (b) [0.004620] [0.003644] [0.320289] [0.085888] (c) [0.003696]* [0.001448] [0.192247] [0.033698]** (d) [0.005723] [0.003496] [0.202775] [0.089881]RCA*PRODY*Pref ( 123) 0.000898 -0.001299 -0.096922 -0.03393 (a) [0.000678] [0.000609]** [0.054323]* [0.010766]*** (b) [0.000587] [0.000225]** [0.080238] [0.015241] (c) [0.000410]* [0.000111]*** [0.034942]* [0.009894]** (d) [0.001064] [0.000703]* [0.075405] [0.019064]*Constant 1.147015 -0.107528 25.062329 -16.695486 (a) [0.834799] [0.293891] [26.592804] [7.396664]** (b) [0.787061] [0.337974] [40.145074] [12.665939] (c) [0.838050] [0.164107] [32.027566] [4.478368]** (d) [0.822823] [0.480858] [32.187082] [11.382700]Observations 8394 12225 324 1800R-squared 0.73 0.62 0.17 0.69

Data appendix