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

Research questions General Issues economic integration 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? trade structure Is the trade structure relevant? theory vs. empirics static vs. dynamic role of export composition 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 criticisms on the robustness of the evidence 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. Luca De Benedictis: Trade and other openness indicators often positively criticisms on the robustness of the evidence 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 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)?

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 Relevance of these issues for the Mediterranean countries Are trade and export composition related to these problems ? Can an export-led growth model be achieved?

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 Research questions

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 Barcellona Agreement as a compensation for the trade diversion? Growth of Med economic integration with the EU - and growth of their trade in general - somehow disappointing The EU - Med partnership

EU trade with the CEECs and with the MEDA group

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:

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

Measuring export structure and similarity Export structure: the vector of shares of each sector on total exports, x 1j, ……x nj. 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.

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

Methodological pointsSimilarity => (1 – Distance) Distance: Bray-Curtis index similarity Measuring similarity in trade structures through a synthetic metric based on distance (De Benedictis-Tajoli, 2004) SELF-SIMILARITY EU-SIMILARITY 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) countries Export sectoral shares sectors j = country k = benchmark x = sectoral export share i = sector Strong similarity  1 Weak similarity  0 Similarity in Trade Structures

Methodological points similarity Advantages of such a similarity index 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

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

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 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 On the demand side: opening of the EU market can influence the export structure of the MEDA to accomodate the European demand Are these effects at work for the Mediterranean countries? Has integration gone far enough to produce them?

Exports toward the EU market: total and OPT trade Correlation for Tunisia: 0.95

Exports toward the EU market: total and OPT trade Correlation for Israel: 0.39

Exports toward the EU market: total and OPT trade Correlation for Turkey: 0.40

Export structure correlated to export volumes Changes in export composition correlated with increase in EU similarity Changes in export composition correlated with inward FDI Some regression results Changes in export composition correlated with OPT

Similarity in export composition and trade