1.3 Methodological approach: The augmented gravity specification
1.3.2 Variables: definition and economic intuition
The interaction variables retained allow to better grasp some main characteristics (Table 3) of these South-South trade relations.
Income dissimilarity index
We use an income dissimilarity index to take into account the heterogeneity within developing countries. In our case, we observe several level of economic development in SSA, where differences appear also relative to BRICs (Table 10). The expected sign can be both positive and negative. A positive sign could support the inter-industry trade hypothesis in the spirit of Hecksher, Ohlin and Samuelson (HOS) to the extent that income dissimilarities imply different factor endowments. A negative sign, on the contrary, corroborates the intra-industry trade approach of Linder (1961) stating that income dissimilarities intensify trade by increasing the amount of demand overlap19. The GDP p.c. dissimilarity (absolute value) is “measured by |(y(yit−yjt)
it+yjt)|, where y is real GDP per capita measured in PPP-based constant 2000 US dollards” (Cheong et al., 2015). This index is bounded between -1 and +1 where the value of zero indicates identical level of development between countries.
GATT-WTO
The multilateral trade liberalisation through the GATT-WTO agreements raised the matter of their influence in the strong development of South-South trade in
unobserved trade barriers. To the extent that it is very difficult to have price indices for each country of the sample, fixed effects through country and country-pair allow us to account for this multilateral resistance even if some variables will be removed according to the fixed effects used.
19“Even without a PTA, countries more similar in size, income and location trade more than those less similar” (Cheong et al., 2015) because similar demand structures could increase trade gains (McPherson etal., 2001)
the world trade, especially since the China’s accession in 2001 compared with the other BRICs. The expected sign is positive due to the reduction of trade barriers with a tariff liberalisation between member countries even if a heterogeneity can appear according to the nature of trading partners (Subramanian and Wei, 2007).
The GATT-WTO variable20 takes 1 if trading partners are WTO’s members, and 0 otherwise.
Terms of trade index
Two periods appear in the historical evolution of terms of trade for developing resource-rich economies with a deterioration until the 1990s and then an improve-ment, essentially due to the growing demand of emerging countries, notably “Asian giants”, in natural resources to sustain their economic development. In accordance with the Marshall-Lerner effect (Bahmani et al., 2013), an improvement in terms of trade is supposed to exert a negative impact on exports and a positive one on im-ports (wealth effect) due to the deterioration of exim-ports’ price-competitiveness where the price effect is higher than the volume effect. The terms of trade index is “ the percentage ratio of the export unit value indexes to the import unit value indexes, measured relative to the base year 2000”21.
Natural resources
These South-South trade relations are mainly based on the increasing role of resource-rich countries, particularly SSA countries (Table 11), due to the economic interde-pendence with BRICs. The expected effect of this variable is positive because “if the
20Note that Russia became a member in 2012 and China in 2001, whereas Brazil and India are founding members.
21http://data.worldbank.org/indicator/TT.PRI.MRCH.XD.WD
demand for a natural resource is relatively high, the standard gains from trade will result, and free trade will increase the welfare of both the natural resource import-ing and exportimport-ing countries” (Emami and Johnston, 2000). The resource variable22 equals 1 if SSA countries are richly endowed in natural resources and 0 otherwise.
Democracy
The expected theoretical impact on trade flows is positive because “democratisation and its associated quality institutions can potentially reduce trade costs associated with the risks of trading by improving the trust in an exporter” (Yu, 2010). More-over, a democratic political regime could be followed by a move to liberalise trade and so by an increase in trade flows. Indeed, Milner and Kubota (2005) point out that democratisation, which implies an increase in the electorate’s size, changes the calculations of political leaders about the optimal level of trade barriers. Then, im-plementation of trade policies that better promote the welfare of consumers/voters are desirable, which results in trade liberalisation in this context. Nevertheless, the principles of non-interference and unconditionality characterising the doctrine23 of BRICs in South-South relations suggest that they don’t make differences between democratic and non-democratic countries (Table 11), that is to say an ambiguous effect (Makhlouf et al., 2015). The democracy variable24 takes 1 if SSA countries have adopted a democratic electoral system and 0 otherwise.
22A country is considered well endowed in natural resources when two conditions are met: (i) the value of the energy sector rents represents at least 5% of the gross national income and; (ii) the share of raw goods in exports exceeds 20% for at least five years from the reference period (Collier and O’Connel, 2007).
23http://www.brics.utoronto.ca/docs/150709-ufa-declaration_en.html
24“There are three main and interdependent elements: (1) the presence of institutions and proce-dures through which citizens can express effective preferences about alternative policies and leaders, (2) the existence of institutionalised constraints on the exercise of power by the executive, (3) the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation”.
For more precisions, refer to: http://www.systemicpeace.org/inscr/p4manualv2013.pdf.
Geographic distance
The bilateral geographic distance between countries is “calculated following the great circle formula, which uses latitudes and longitudes of the most important cities/agglomerations (in terms of population)” as defined by the CEPII. The more geographically remote countries are, the less they will trade because of the costs of trade, that is, a negative impact on bilateral trade is expected (Disdier and Head, 2008).
Common language
Shared a common language is a colonial legacy that can improve trade flows between developing countries having had the same colonizer such as Brazil and India with some former colonies in SSA (Table 11). This facilitates trade between partners by reducing transaction costs such as communication and translation (Lohmann, 2011
; Egger and Lassmann, 2012). The language variable equals 1 if trading partners share a common language, and 0 otherwise.
Table 1.3: Data sources
Variables Sources
Bilateral exports flows DOTS (IMF) and COMTRADE (UN) Real GDP per capita dissimilarity Calculations based on Cheong etal. (2015)
GATT-WTO WTO
Terms of trade index (2000 = 100) World Bank & Word Development Indicators Democracy Polity IV Annual Time-Series 1800-2014 Resource-rich countries Collier and O’Connell (2007)
Distance CEPII
Language CEPII
Note: We use the worldwide database developed by HMR.