Trade similarity across the Mediterranean Basin

1. Trade similarity across the Mediterranean Basin Luca De Benedictis and Lucia Tajoli Università di Macerata Politecnico di Milano Bridging the gap: the role of trade and FDI in the Mediterranean Naples, 9 June 2006

2. General Issues Is economic integration affecting trade structures making countries more similar or more diversified in terms of production and trade patters? Which are the implications of a given specialization? Is the trade structure relevant? theory vs. empirics static vs. dynamic Which is the role of export composition in determining income convergence within a group of countries (catching-up)? Luca De Benedictis: Trade and other openness indicators often positively associated to growth, but criticisms on the robustness of the evidence, on the indicators used, and on the lack of a clear underlying mechanism linking the two variables. Research questions

3. Research questions Does it make a difference to change the export pattern? Does it matter to become more or less similar to a given country or group of countries? Does it matter in which way (in terms of forms of integration and in terms of sectoral composition) a country is open (and not only how much it is open)?

4. Relevance of these issues for the Mediterranean countries Relatively high GDP growth rates for the MED countries, but little or no catching-up in terms of GDP per capita Many political and institutional problems hampering growth and integration Difficulties in running acceptable growth regressions for these countries Are trade and export composition related to these problems ? Can an export-led growth model be achieved?

5. Research questions Aim of this work: -verify if export structures in the process of economic integration with the EU has become more similar to the EU export structure - verify if the change in the export structure is associated with other forms (non-traditional trade) of economic integration - verify if export structures capture characteristics of the development process

6. The EU - Med partnership A group of countries with very strong ties with the EU Initial agreements very early, in the late 1978 EU is the main trade partner for the MED group, but not for all Growth of Med economic integration with the EU - and growth of their trade in general - somehow disappointing Barcellona Agreement as a compensation for the trade diversion?

7. EU trade with the CEECs and with the MEDA group

10. Data and sources for this empirical analysis Countries: Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestinian territories, Syria, Tunisia, Turkey Benchmark: EU15 Trade data: exports toward the EU market in 97 sectors from Comext, Eurostat database Time period: 1990-2003

11. Characteristics of the export composition of the MED Three groups of countries in this sample: Mono-export (fuel) countries: Algeria and Syria Diversified but not changing Diversified and changing

34. Measuring export structure and similarity Export structure: the vector of shares of each sector on total exports, x1j, ……xnj. Self-similarity: taking a base year, we observe how a country export structure changed in time. The change is measured by the variation of the correlation or distance indices. EU-Similarity: we compare a country’s export structure with the one of the EU, using different indices. We compare country’s export structure to the EU benchmark over time to observe whether differences narrow or widen.

35. Why similarity in trade structure should matter? Some possible channels: Productivity Selection (Melitz, 2003) Knowledge spillovers (Keller, 2002) Factor composition (Slaughter, 1997; Ventura, 1997) => proxy used: high-tech intensity Investments FDI Outward Processing Trade => proxy used: FDI + OPT Adaptation to international demand The Linder hypothesis (Linder, 1961; Markusen, 1986) => proxy used: growth in demand Stability International risk sharing (Acemoglu and Zilibotti, 1997) Optimal currency area arguments => proxy used: efficiency of financial system and institutions

36. Measuringsimilarityin trade structures through a synthetic metric based on distance (De Benedictis-Tajoli, 2004) Distance: Bray-Curtis index Methodological points Similarity in Trade Structures => (1 – Distance) Similarity j = country k = benchmark x = sectoral export share i = sector Strong similarity  1 Weak similarity  0 countries sectors Export sectoral shares Measuring similarity in trade structures both with respect to itself at the beginning of the period (SELF-SIMILARITY), and with respect to the EU15 (EU-SIMILARITY)

37. Advantages of such a similarityindex with respect to other alternatives: - no need of a normal distribution of observations, it is is appropriate in presence of skewed distributions (unlike correlation) - change of weight of sectors is taken into account (not based on pure ranking) =>it capture changes due to specific sectors - this particular index is immune from the double-zero paradox, it has the advantage of not increasing in the number of sectors considered, n; of being invariant to proportional sub-classifications of the n sectors considered; of considering both large and small differences Methodological points

39. A comparison with another group: The EU- and SELF- similarity Plot for the CEECs

40. How can economic integration influence the observed changes? On the supply side: through FDI and other forms of delocalization of production, production sharing agreements between the EU and the MEDA can affect the share of exports in important sectors On the demand side: opening of the EU market can influence the export structure of the MEDA to accomodate the European demand Previous result for the CEECs confirm the relevance of these effects: changes in the export structure of all CEECs is driven by changes in a few sectors highly involved in processing trade, and growth in EU demand also plays a role. But for the CEECs international fragmentation of production can foster both convergence and divergence of trade structures Are these effects at work for the Mediterranean countries? Has integration gone far enough to produce them?

50. Exports toward the EU market: total and OPT tradeCorrelation for Tunisia: 0.95