Diplomatic Relations and Trade Reorientation in Transition Countries

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Diplomatic Relations and Trade Reorientation in
Transition Countries

• Mathilde Maurel (CES, Université de Paris 1
  Panthéon Sorbonne)
• Emiel Afman (Ministry of Finance, the Hague)
• The views expressed are on personal title and are
  not to be attributed to one of the institutions
  above (they do not necessarily converge)

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This presentation

• 1. Introduction
• Focus on post-transition trade reorientation
• 2. Empirical approach
• Two measures of diplomacy (two datasets)
• One is time invariant
• The second one varies over time
• 3. Results Discussion

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Economic diplomacy is not new

• Columbus, Marco Polo, and others often received
  government finance missing market.
• www.diplomatie.gouv.fr
• La diplomatie économique ne date pas dhier.
  Dès 1720,
• le Régent de France envoyait à Madrid, avec son
  nouvel
• ambassadeur,  un financier marchand pour les
  affaires de commerce  (Saint-Simon)
• Andrew Rose (2007)
•  Is there a raison dêtre for the Foreign
  Service? One answer increasingly given is that
  the Foreign Service promotes exports. 

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Transition has many dimensions

• Economic reorientation of external trade
• Political closer diplomatic relations
• E.g. France created 15 embassies over less than
  10 years
• Is there a significant relationship?

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Central Question

• Basically the same as Andrew Rose
• Can we replicate a similar relationship between
  permanent foreign missions and trade, focusing on
  transition countries?
• We use the gravity equation

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This presentation

• 1. Introduction
• Focus on post-transition trade reorientation
• 2. Empirical approach
• Two measures of diplomacy (two datasets)
• Panel
• country pair specific fixed effects
• 3. Results Discussion

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30 Transition Countries East
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26 industrialized countries (OECD before
enlargement) West
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Two measures of Economic Diplomacy two different
datasets

• Equations 1 and 2
• FMij Number of Permanent Foreign Missions
• Invariant over time in our first sample
  1997-2005
• only cross country (pair) variation
• Equations 3 and 4
• FMijt Correlates of War dataproject (Resat
  Bayer)
• Latest three observations 1995, 2000 and
• 2005. Variation over time and across country
  pairs

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First dataset

• Trade flows between 26 OECD countries and 30
  Transition economies
• Two directions
• 8 years (1997 2004)
• 30x26x2x8 12480 observations max

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Descriptive Statistics FMij
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We notice that on average

• Transition countries have more exporting foreign
  missions in OECD countries than vice versa (1,92
  vs 1,04)
• Countries with natural resources have more export
  promoting missions than countries without (2,17
  vs 1,07)
• Transition countries with natural resources have
  the highest number of export promoting missions
  2,84 (and host a higher number of import
  facilitating missions than transition countries
  without natural resources)

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Intuition? (west-east, 2004)
Log of Exports
Foreign missions of exporting country i in
importing country j
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Second dataset

• FMijt Correlates of War dataproject (Resat
  Bayer)
• Trade flows of 30 transition economies to 26 OECD
  countries (one direction only)
• 3 years (1995 2000 2005)
• 30x26x1x3 2340 observations

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Second measure FMijt
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Average exports (mln usd) by FMij
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Countrypair specific fixed effects

• Kazakhstan exports more oil than Belarus,
  irrespective of the number of foreign missions
  we relax the restriction of one intercept.
• Relation Georgia-Netherlands differs from the
  relation Georgia-France countrypair
  heterogeneity
• ? Cheng et Wall 2004   heterogeneity bias due
  to cultural, historical and political factors
  that are . often difficult to observe, let alone
  quantify

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Gravity Equations 1 and 2

• Benchmark Roses (2007) specification

Robustness check 1 Two steps, countrypair
specific fixed effects, first dataset
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Gravity Equations 3 and 4

• Robustness check 2
• countrypair specific fixed effects, CoW-data

Robustness check 3 Anderson and Van Wincoop
(2003) specification
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This presentation

• 1. Introduction
• Focus on post-transition trade reorientation
• 2. Empirical approach
• Two measures of diplomacy (two datasets)
• Panel
• country pair specific fixed effects
• 3. Results Discussion

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Equation 1 Rose (2007) in one stepforeign
missions invariant over time

• No country fixed effects, No time dummies
• Ln Exp
• 0,166 fmi 0,033 fmj 1,391 distance
  0,968 GDP i 0,694 GDP j 0,143 pop i
  0,277 pop j 0,023 area i 0,040 area
  j 0,788 EEA 0,333 border 0,131
  landlocked
• Significant at 10 5 1
• R2 0,7306
• N 10930

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Equation 1(Ctd) Rose (2007) in one stepforeign
missions invariant over time

• With importer and exporter fixed effects, with
  time dummies
• Ln Exp
• 0,136 fmi 0,070 fmj 1,364distance
  0,344 GDP i 0,688 GDP j 0,616 pop i
  0,310 pop j 0,893 area i 0,070 area j
  0,274 EEA 0,335 border 0,269
  landlocked 2.745 industrialized exp.
• Significant at 10 5 1
• R2 0,79
• N 10930

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Robustness check 1 Rose (2007) in two steps
foreign missions invariant over time

• With time dummies and bilateral fixed effects
• Ln Exp 0.625GDPi0.647GDPj-0.619Popi-0.
  627Popj0.019EEA
• Fixed effects0.125fmi0.126fmj-0.051dist
  ance-0.104areai-0.098areaj-0.426border-0.
  093landlocked
• Significant at 10 5 1
• R20.2684
• N 12000

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Equation 2(followed)
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Robustness check 2 Rose (2007) with second
dataset (CoW-data) foreign missions variable
varying over time, bilateral fixed effects
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Robustness check 3 Anderson and Van Wincoop
(2003) with foreign missions variable varying
over time

• 1996 Ln Exp ln GDPi ln GDPj
  0.304fmi0.443fmj -1.43distance
• 2000 Ln Exp ln GDPi ln GDPj
  0.423fmi0.283fmj -1.502distance
• 2005 Ln Exp ln GDPi ln GDPj
  0.146fmi0.594fmj -1.44distance
• Sigma 5, -0.088 (1996), -0.084 (2000),
  -0.087(2005)
• Sigma 10, -0.040 (1996), -0.038 (2000),
  -0.040(2005)
• Sigma 20, -0.019 (1996), -0.018 (2000), -0.019
  (2005)

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Conclusions

• In all estimated equations (except Rose (2007)
  with time-varying foreign mission variable), we
  found a strong association between investing in a
  foreign mission and trade intensity
• Quantitative interpretations
• Opening an Embassy is associated with an extra
  trade of about 49 (CoW-data) Having one more
  consulate is associated with an extra trade 15
  (First datasets) ? same orders of magnitude as
  Rose.
• The second approach relying upon the Anderson and
  Van Wincoop model, tells us that opening an
  Embassy is equivalent to an ad valorem tariff
  reduction varying from 2 to 8
• A large network of foreign representations seems
  to have a large positive pay-off to home
  economies in terms of exports.

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Diplomatic Relations and Trade Reorientation in
Transition Countries

• Emiel Afman (Ministry of Finance, the Hague)
• Mathilde Maurel (CNRS, Université de Paris 1
  Panthéon Sorbonne)

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• Questions?
• Merci!