Regional Free Trade Agreements: Has the Barcelona Declaration promoted Trade Flow Convergence? Dr Konstantinos Konstantaras, Heriot-Watt University, Dubai Dr Dionysis Philippas, ESSCA School of Management, Paris Prof. Costas Siriopoulos, Zayed University, Abu Dhabi 1 st ESRC conference-workshop Keele University January 2015

Presentation Content Convergence and the Mediterranean trade flows The Barcelona Declaration and the research questions Theoretical modelling and the proposed methodology Econometric specification Results Conclusions

Convergence and the Mediterranean trade flows GDP convergence theories: – Neo-classical absolute convergence (Solow, 1956): the poorer countries catching up the richer GDP per capita, following a common trend – Endogenous growth (Romer, 1986): technological advancement drives growth Growth trends might differ between countries Konstantaras, Philippas, Siriopoulos

Convergence and the Mediterranean trade flows GDP convergence through Free Trade Agreements (FTAs): – Reducing trade barriers: Enhanced learning-by-doing Cheaper capital goods FDI – Regional blocks: The name of the game Konstantaras, Philippas, Siriopoulos

FTAs: Konstantaras, Philippas, Siriopoulos

Convergence and the Mediterranean trade flows But… – Development of poor countries falls on their own shoulders (e.g. the curse of oil) – Free Trade Agreements might induce trade divergence – Institutional reforms are paramount Konstantaras, Philippas, Siriopoulos

The Barcelona Declaration and the research questions The Barcelona Declaration – Until the 1990s, MENA countries experienced low levels of trade integration with the rest of the world – In 1995 the Barcelona Declaration instituted an FTA framework to ‘spur’ growth (European Mediterranean FTA -EMFTA) Konstantaras, Philippas, Siriopoulos

The Barcelona Declaration and the research questions Konstantaras, Philippas, Siriopoulos Source: De Wulf and Maliszewska, (2009)

The Barcelona Declaration and the research questions The Barcelona Declaration – Criticism against the EMFTA: General: “trade is a means to an end, not an end in itself” (Rodrik, 2001, p.35) Specific: MENA counterparties could be better off participating in the Greater Arab Free Trade Agreement (GAFTA) and from trade barrier protection versus the EU giants (Yanikkaya, 2003). Konstantaras, Philippas, Siriopoulos

The Barcelona Declaration and the research questions The Barcelona Declaration – Has it promoted trade flows? Trade openness [(Exports+Imports)/GDP] measures the degree a country’s economy is integrated Smaller countries are more ‘integrated’ Geography, history, culture, trade policy, presence of multinationals (re-exporting) differentiate ‘integration’ Konstantaras, Philippas, Siriopoulos

The Barcelona Declaration and the research questions Trade openness in OECD* Konstantaras, Philippas, Siriopoulos *from accessed 1/10/2014http://

The Barcelona Declaration and the research questions The Barcelona Declaration – Has it fostered trade-flow regional convergence? Increased trade flows is the cornerstone of FTAs Regional trade flows compete with global It measures ‘trade ties’ within a regional bloc It does not necessarily imply economic integration – Is EMFTA the right trade-flow-convergence policy tool? Konstantaras, Philippas, Siriopoulos

The Barcelona Declaration and the research questions – Has Barcelona Declaration promoted trade? – We measure the trade flow convergence (openness) between Euro-Mediterranean Partner (EMP) countries before-after Barcelona Declaration Konstantaras, Philippas, Siriopoulos

Theoretical modelling and proposed methodology An ‘atheoretical’ formulation for openness’ convergence (Arestis, et al., 2012) based on Barro and Sala-i-Martin (1990, 1992) Unconditional (absolute) and conditional (relative) convergence Testing ‘catching-up’ between trade flows within same country or across partners Dynamic panel cointegration analysis Konstantaras, Philippas, Siriopoulos

Data Konstantaras, Philippas, Siriopoulos  Penn World Table 7.1 (2012)  Macroeconomic trade data in 2005 constant prices (Heston, et al, 2012)  Centre d'Etudes Prospectives et d'Informations Internationales CEPII (Mayer and Zignago, 2006)  Geographic distances between major cities

Results Konstantaras, Philippas, Siriopoulos Unconditional convergence (classic)

Results Konstantaras, Philippas, Siriopoulos Convergence with European continent dummy

Endogeneity testing Econometric test – control function (Wooldridge, 2002) Konstantaras, Philippas, Siriopoulos

Results Konstantaras, Philippas, Siriopoulos

GMM specification GMM with spatial interdependence Instruments Konstantaras, Philippas, Siriopoulos

Results Konstantaras, Philippas, Siriopoulos Unconditional convergence with GMM

Results Konstantaras, Philippas, Siriopoulos Unconditional convergence with GMM

Conditional convergence to the leader Classic test (Arestis, et al., 2012) Konstantaras, Philippas, Siriopoulos

Results Konstantaras, Philippas, Siriopoulos

Results

Dynamic panel convergence Following Nahar and Inder (2002) the divergence from the average or the leader is: Condition for convergence to the average: The first condition for convergence to the leader might be positive or negative, depending on the relative historical values Konstantaras, Philippas, Siriopoulos

Dynamic panel convergence Introducing business cycles with Fourier expansion: The condition for convergence to the average is: -> 0 The second ‘cyclical’ Fourier expansion term should be zero Konstantaras, Philippas, Siriopoulos

Results: convergence to the average

Konstantaras, Philippas, Siriopoulos Results: convergence to the EU

Konstantaras, Philippas, Siriopoulos Results: convergence to France

Is there a ‘structural’ discontinuity in openness’ long-run relations? Long run cointegration of openness, per capita GDP and spatial openness (Bergheim, 2008) VECM formulation: Konstantaras, Philippas, Siriopoulos

Results: cointegration with p.c. GDP

Konstantaras, Philippas, Siriopoulos Results: cointegration with spatial openness

Conclusions Barcelona Declaration’s FTA tool does not assist trade convergence in the Mediterranean Before it, trade flows converged Allowing for oil producers and traditionally open economies EMFTA failed to promote trade Deeper integration might be to the right direction Konstantaras, Philippas, Siriopoulos

Further research FTA has given room to DCFTA (Deep and Comprehensive FTA) – 2011 agreement between EU, Egypt, Jordan, Morocco, Tunisia: "We are offering Egypt, Jordan, Morocco and Tunisia progressive economic integration into the EU single market and want to improve the conditions for market access to the EU for these four WTO members as they engage in a process of democratic and economic reform*." Konstantaras, Philippas, Siriopoulos *EU Trade Commissioner from accessed 1/10/2014http://europa.eu/rapid/press-release_IP _en.htm?locale=en