A NEW PERSPECTIVE ON TRADE IN AGRICULTURAL PRODUCTS - A CASE STUDY ON THE UKRAINIAN FOOD EXPORTS NEUE PERSPEKTIVEN ZUM HANDEL

MIT AGRARGTERN - EINE FALLSTUDIE ZU UKRAINISCHEN NAHRGUNGSMITTELEXPORTEN

Abstract This paper presents the results of an analysis of factors determining the Ukrainian agricultural export trade. In order to explore the Ukrainian trade, an augmented gravity model, covering the period 1996-2009, has been created. It includes the introduction of two new measures related to the productivity level in the country. Relevant characteristics of Ukraines trade relations - Soviet past and current partnerships - are included in the model as dummy variables. The conducted regressions, applying a random effects model to catch time-effects in data panel, proved that countrys agricultural export trade follows the patterns of the gravity model. Hence, the exports increase with the size of trading partners GDP and decrease with the geographical distance to them. Furthermore, transport costs are crucial for the agricultural sector as the large negative magnitude of the estimator shows. The technology level in the country has a positive impact on the agricultural exports. Using the results as scientific arguments, policy recommendations have been made. The economic growth in Ukraine might also have strong impacts on EU agricultural sector and consumers. The findings of the analysis point out that the gravity models of agricultural trade are relevant supportive instruments for policy formulation. Keywords: agriculture, export trade, gravity model, Ukraine Zusammenfassung In dieser Publikation wird ein Agrarauenhandelsmodell und die Forschungsergebnisse einer Fallstudie zu den Determinanten der ukrainischen Agrarexporte prsentiert. Zu diesem Zwecke wurde das Gravitationsmodell des internationalen Handels weiterentwickelt. Der Analysezeitraum umfasst die Jahre 1996 bis 2009. In das Model wurden zwei neue Parameter integriert, die die landwirtschaftliche Produktionsfhigkeit eines Landes fassbar machen. Mit Hilfe von Dummy-Variablen wurden zwei besondere Charakteristika der ukrainischen Exportwirtschaft, das wirtschaftliche Erbe der Sowjetherrschaft und die regionale Handelsintegration, im Handelsmodell bercksichtigt. Durch die Nutzung eines RandomEffects-Modells fr die Regressorenschtzung konnten idiosynkratische Effekte mit einbezogen werden. Die Forschungsergebnisse belegen, dass der Agrarauenhandel grundstzlich den Grundannahmen des Gravitationsmodells folgt. So steigt das Volumen der landwirtschaftlichen Exporte proportional zur auslndischen Kaufkraft, gemessen als BIP des Handelspartners, und sinkt umgekehrt proportional zur relativen geographischen Entfernung zwischen den Volkswirtschaften. Weiterhin konnte festgestellt werden, dass Transportkosten im Agrarsektor von immenser Bedeutung sind. So hat der bestimmte Schtzer einen stark negativen Effekt auf das Handelsvolumen. Auch das Technologielevel im Inland ist von Bedeutung, da ein positiver Effekt zu verzeichnen ist. Die Forschungsergebnisse wurden genutzt, um landwirtschaftspolitische Empfehlungen auszusprechen. So wird sich das Wirtschaftswachstum in der Ukraine und in den anderen Transformationslndern stark auf den europischen Agrarsektor und die EU-Konsumenten auswirken. Die Ergebnisse besttigen, dass das entwickelte Gravitationsmodell des internationalen Agrarhandels ein relevantes Instrument fr die Formulierung von Politikempfehlungen ist. Schlsselbegriffe: Agrarwirtschaft, Exporthandel, Gravitationsmodell, Ukraine
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Introduction In Ukraine, farming sector plays a major role for the whole economy. This is interesting as in most of the other industrialised economies the contribution of agriculture to the gross domestic product (GDP) is rather low. Agriculture adds on heavily to the countrys export trade. The sector is a major employer of unskilled and skilled labour in Ukraines rural areas. In 2008, almost 16% of the working-age labour force was employed both directly and indirectly in the sector, even though a falling tendency is observable (WORLD BANK, 2012). Furthermore, the foreign sale of agricultural goods accounts for more than 20 % of the countrys total merchandise export trade (WTO, 2012). Because of the importance of the agricultural sector for both, national economies and global food security, we have approached our research with the following questions: 1) What are the drivers of agricultural exports in transition economies?; 2) Do the mechanisms underlying the gravity model explain foreign demand on agricultural goods?; 3) What are the potential consequences of the development trends, observable in the agricultural sectors of the transition countries, for the global food security? To illustrate the characteristics of the agriculture sector, we conducted a case study on the Ukrainian economy, applying a gravity approach. We assumed that the trade of agricultural goods differs from the trade in other goods. Usually, agricultural products are considered as products with relatively low unit value. This claim is supported by the fact that agricultural goods are subject to different principles regarding production and trade, as they demand different capital inputs. For international trade, transport costs and countries economic size are of high relevance. The volume of trade is negatively correlated with the geographic distance between the trading economies. Furthermore, the economic size of the partners is positively correlated with the ability to exchange goods. Thus, the theoretical underpinning to the gravity equation, provided by DEARDORFF (1998), RUDOLPH (2009) and others, finds confirmation in this paper. The technology level of a country is a major driver of production and overall growth in each economic sector. The production of agricultural goods is particularly affected by the access to technology, i.e., the access to seeds, mechanization, human capital and others. This directly influences the ability to export agricultural commodities. However, technology is not equally distributed among economies. It confirms the main assumption of the endogenous growth theory by ROMER (1994). We assume that technology has a positive impact on export trade. For this reason, we derived a proxy to measure the level of access to technology. We use GDP per capita as a measure. Countries with low GDP per capita have a low income and also a low level of value-added per unit of used capital. We claim that there exists a direct relation between the technology available in the agricultural sector and the GDP per capita. However, we also follow the critique brought up by GROSSMAN (1998) and state that, in frictionless trade, entities would still care with whom they exchange goods and services. Not only the direct costs to trade but also unfamiliarity might negatively affect the volume of trade. In their papers, GROSSMAN (1998) and HUANG (2007) point towards common polity, common language and common culture as potentially relevant factors. We propose a further extension of these researches by a parameter which measures the impact of traditional economic relations. This reflects the economic heritage of a country, like the one in the former Soviet Union (FSU). Thus, we assume that a membership in the FSU has a positive impact on the volume of trade between the economies in transition. Furthermore, we propose another factor to increase the reliability of our model as post-Soviet economic integration of space has a proven positive impact on the volume of export trade (STEINBACH, 2012). The magnitude of the impact on agriculture export trade in transition countries is measured through the membership in the Commonwealth of Independent States (CIS).
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A further characteristic of the agricultural sector is the existence of a negative correlation between the value-added to goods and the volume of export trade. The more the value is added in the agricultural sector, the lower are the exports of these goods. Both a higher quality and a higher level of processing lead to a larger domestic demand, since local consumers substitute imports with domestic products. This is particularly the case for transition economies. Moreover, we claim that the export of unprocessed agricultural products is falling too, since they serve as raw materials for the locally processed ones. In order to reveal the trade characteristics of agricultural goods, we created two models applying different parameters. The first model uses a measure of the domestic agriculture share in GDP, which indicates the production capacity. The second model applies another proxy for the production capacity. We derived the parameter as a fraction, where the nominator is the number of tractors per ha multiplied by the size of available arable land (in ha) abroad. The denominator is the domestic equivalent of this product. In both models, the derived production capacity plays an essential role as it determines the very ability of a country to export goods. The derived results give us a better understanding of the characteristics of agricultural export trade in transition countries, particularly in Ukraine. The economic development in those countries has considerable implications for the European Union (EU) as they export a great amount of agricultural goods to the members of the EU. But, not only EU-members are influenced by this development, also food security on a global scale depends on it. Therefore, we assume that the results of this research will give political decision makers the necessary tools to reevaluate current development strategies and reappraise the implementation of regional trade policies. Overview of Ukraines Economic Performance and Trade in Agricultural Goods After the economic crisis, brought in the 1990s by the disintegration of the Soviet Union (SU), Ukraine experienced a period of impressive growth. The first serious market reforms after the oligarchy domination led to a six-time increase of the GDP per capita, from US$636 in 1999 to US$3,891 in 2008 (see Figure 1). The period between 1990 and 2000 might be a lost one for Ukraine from an economic point of view. This is due to the fact that the country did not manage to follow the performance of other Central and Eastern European transition economies. However, the macroeconomic indicators prove that the country was catching up, at least until the recent global financial crisis. In Ukraine, the raise of the agriculture GDP was slower but more stable than the raise of the total GDP. It is mainly due to the fact that the return rate for an investment in the agricultural sector is low. By comparison, the services and construction sectors offer higher rates of return. The investments in agricultural production are long-term projects as the invested capital is less mobile than in the services sector. The Ukrainian GDP experienced huge fluctuations and was falling between 1997 and 1999, as well as from 2008 on, with a recovery trend observable after 2010. The agriculture GDP was exposed to these crisis periods too, but the consequences for the general development in the sector were far less damaging. During the period under review, agricultural export trade developed accordingly, growing by value in the period between 1999 and 2008 from US$1.43 billion to US$10.82 billion, which is by 754 % (see Figure 2). The sector exhibited more stability in trade too, reacting less dramatically to the crises than the whole economy. Since the foreign demand and domestic production of main agricultural products are relatively inelastic, trade in these goods is less exposed to big changes, such as the recent financial crisis. This does not, however, mean that the Ukrainian agriculture can feel risk-free about its customers abroad. Low rates of modernization in this sector might impel countries like Russia to look for substitutes by
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producers offering higher quality or to increase the incentives for an extension of investment in their own agricultural sectors. An increase in production in other transition economies reduces the demand for Ukraines agricultural commodities, which would further reduce incentives for investment and slow down reforms in the Ukrainian farming sector (HEYETS & SKRYPNYCHENKO, 2010).

Figure 1: Development of the Ukrainian GDP and Agriculture GDP in Millions of Current US$ for the Period 1996-2009 Sources: Authors Calculation and Illustration, World Development Indicators Databank (2012)

Figure 2: Ukraines Merchandise and Agricultural Export Trade in Millions of Current US$ for the Period 1996-2009 Sources: Authors Calculation and Illustration, International Merchandise Trade Statistics (2012)

Still, there is much of potential for further growth in agricultural export trade. Ukraine enjoys a tariff free access to all markets of the CIS and belongs - along with Azerbaijan, Georgia and Moldova - to GUAM1 and - along with Belarus, Kazakhstan and Russia - to the Common Economic Space (CES). Kiev signed also bilateral free trade agreements with all former Soviet republics2, apart from the Baltic States3 and Turkmenistan. The biggest single trade partner for Ukraine is Russia (CHAUFFOUR ET AL., 2010). In fact, while the transition economies of the Central Europe changed their patterns of trade according to their membership in the European Union, also CIS countries developed trade with the EU, but they have maintained strong links to each other too (LANE, 2011). However, in the second half of the 1990s, it was the trade with countries outside of the CIS area which grew at most and contributed to the strong growth of the Ukrainian GDP (CRISTEV, KUPETS & LEHMANN, 2005). It might be a general reorientation in Ukraines trade geography or merely a diversification of partners, motivated by an artificial distortion of the direction and magnitude of export trade. Key agricultural products exported are barley, wheat, maize, sunflower seeds and oil, rapeseeds, cheese and cattle meat (FAO, 2012; CHAUFFOUR ET AL., 2010). Ukraine is a global player in agriculture commodity trade. Its arable land, i.e. land under temporary crops, amounts to around 32.5 million ha (FAO, 2012), which places Ukraine at the 9th place in the world. The fertility of agricultural land made it possible that the country had a share of 8.6 % in the global wheat trade in 2009. Export restrictions introduced by Kiev may lead to shortages in important Ukrainian products on the global market, especially as they usually induce analogical measures on the side of other relevant exporters. This happened, for instance, in 2008, when - after Ukraine - similar restraints on wheat exports were introduced by Russia and Kazakhstan (KIM, 2010). All three countries together are sources of almost one fourth of wheat trade on the international market (FAO, 2012). Specification of the Gravity Model, Empirical Application and Data The gravity model of international trade (GMIT) provides us with a reliable tool to model trade flows between countries (LEAMER and LEVINSOHN, 1995). The model was inspired by Newtons theory of gravitation and first applied by JOHNSON and RAVENSTEIN (1885) to show that the motivations of emigrants to migrate were linked to the distance between their home country and the destination. TINBERGEN (1962) modified the approach and substituted migration flows by trade flows, Xij. He assumed that a negative correlation with the costs to trade exists. In his model, trade costs are represented by the distance, Dij, between economies and he simulated the gravity of planets in Newtons model as the size of each economy, measured as GDP (Yi for home and Yj for foreign). Therefore, TINBERGEN (1962) came up with the following cross-sectional gravity model:

X ij 0

Yi 1Y j2
3 Dij

(1)

where 0, 1, 2 and 3 are parameters to be estimated. In recent years, numerous empirical applications, e.g. such as of MTYS (1997), CHEN and WALL (1999), EGGER (2000) and ATICI and FURUYA (2008), have considerably improved the specification of the GMIT. At the same
GUAM Organization for Democracy and Economic Development. The abbreviation GUAM states for the first letters of the member states names: Georgia, Ukraine, Azerbaijan, Moldova. 2 Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russian Federation, Tajikistan and Uzbekistan. 3 Estonia, Latvia and Lithuania.
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time, LIMAO and VENABLES (2001), ANDERSON and WINCOOP (2003), NOWAK-LEHMANN DANZINGER et al. (2005) and ERDEM and NAZLIOGLU (2008) refined the basic explanatory variables and supplemented the model with additional parameters. For our model, we modify the trade flow equation of ERDEM and NAZLIOGLU (2008). They used the model of MARTINEZ-ZARZOSO (2003) to estimate Turkeys export trade as follows:
3 6 5 X ij 0 Yi 1Y j2 Dij YNi4 YN j Aij uij

(2)

where the original model of TINBERGEN (1962) is refined by several explanatory variables, which help to increase the explanatory power of the GMIT. YNi and YNj stand for the incomes per capita, for home and for foreign respectively. Aij represents any other factors affecting the agricultural export trade flows and uij is the error term. The model applied by ERDEM and NAZLIOGLU (2008) needs some improvement as it is based on assumptions which do not reflect reality properly. For instance, it is not clear to the authors of this paper why the GDP in home is the right measure to explain the increase in agricultural exports. Furthermore, there is a direct correlation between Yj and YNj as the population remains almost constant in the reviewed time period. Both factors are used to reflect demand abroad. Therefore, we developed an augmented GMIT which is capable to capture the specific characteristics of the agricultural sector. The model is formulated as follows:
5 AEX ij 0 AYi 1Y j2 DWij3 YNi4 Zij uij

(3)

where AEXij determines agricultural export trade. We assume that using the agriculture GDP, AYi, and dropping the GDP per capita abroad, YNj, increases the reliability of our model and yield more efficient estimators. Also, we assume that non-scalar variables affect agricultural exports. To take this into account, we use dummy variables, integrated in the model as Zij. However, we introduced and tested a second measure for the ability of Ukraine to export agricultural goods (TLijt), which might help to improve the specification of the model. On the basis of Equation 3, we formulated the following empirical model, which helps to determine the factors explaining Ukraines agricultural exports:

ln AEX ijt ln 0 1 AYijt 2 Y jt 3 DWij 4 YNit 5 FSU ij 6 CISijt uijt uijt ij t ijt
(4)

where the total unobservable effect, uijt, is split into the unobservable individual effect, ij, the unobservable time effect, t, and the unobservable stochastic error term, ijt. Ukraine is represented by i while j stands for its trading partners and t is the observed reference period (t = 1996, 1997, , 2009). For this research, we estimate two different models. In the second model, AYijt was substituted by TLijt. Furthermore, we assume decreasing returns to scale for each variable and therefore we applied the squared value of each parameter for the regression. The dummy variables and TLijt are excluded from this procedure. To estimate the gravity model, we developed a panel dataset, using and deriving the dependent variable and independent parameters as follows: Data on the Ukraines agricultural export trade come from the International Merchandise Trade Statistics (IMTS)4 of the United Nations Statistics Division (UNSD). In our research model, we determined agricultural exports, AEXijt, as the sum of the following classification levels of the Standard International Trade Classification, Rev.3, Catalog: food and live
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Available at: http://comtrade.un.org/db (Access: February 28, 2012)

animals (0), beverages and tobacco (1), hides, skins and fur skins, raw (21), oil-seeds and oleaginous fruits (22), crude rubber (23), textile fibers (26), crude animal and vegetable materials (29), and animal and vegetable oils, fats and waxes (4). We excluded trade events smaller than US$1,000 from the panel set as they would cause distortions in our estimation results. Agricultural export trade is scaled accordingly in thousands of current US$. The endogenous distance variable is provided by the gravity database of the Centre dEtudes Prospectives et dInformations Internationales (CEPII)5 and measured in kilometers. MAYER and ZIGNAGO (2011) developed the measure and computed the weighted distances using citylevel data to assess the geographic distribution of population inside each nation. This approach is based on the research of HEAD and MAYER (2002). We apply the modified distance measure, DWij, to obtain a better understanding of the influence of the distance between trading economies on agricultural export trade. The incorporation of the modified distance variable allows to capture the spatial economic characteristics of each economy and to model a country specific multi-core infrastructure. According to the gravity model, we assume that the weighted distance has a negative sign. We used the World Development Indicators (WDI) databank6 of the World Bank to obtain data for the percentage share of agriculture in the GDP and for the Ukrainian total GDP. To construct the agriculture GDP variable, AYit, we multiplied the Ukrainian GDP by the percentage share of countrys agriculture GDP. The variable is measured in thousands of current US$ and we expect the sign of this parameter to be negative. A higher agriculture GDP indicates a higher level of added value for agriculture goods. We assume that the increase in processing depth enlarges the domestic demand for food commodities produced in Ukraine. In this research, an additional measure for the ability of Ukraine to export agricultural goods is introduced and tested. We assume that the level of mechanization and the availability of arable land represent countrys exporting abilities. A country with plenty of arable land and a high level of mechanization, relatively to its partner, can export more agricultural goods to this partner. To compute the variable, TLijt, we used WDI data on arable land in hectare (ha), where lanit stands for Ukraine and lanjt for its trading partner. As a proxy of mechanization, we took data from the WDI on the number of agricultural machinery per ha of arable land, where tracit is used for Ukraine and tracjt for its partner. Using this data, we constructed a measure for the relative ability of Ukraine to export agricultural goods as follows:
TLijt trac jt lan jt tracit lanit

(5)

We expect the sign of this variable to be positive and its magnitude to be smaller than the one of the agriculture GDP measure. This is due to the fact that the proxy is not able to catch the value added by processing raw agricultural materials in farming and processing industries. To capture the demand abroad for Ukraines agricultural commodities, we introduced the GDP of its trading partner, Yjt, as a proxy. The variable is derived from the WDI databank and is measured in thousands of current US$. We expect the foreign demand to have a positive impact on Ukraines export trade. Indeed, the effect is positive, but we assume that the magnitude is small as food demand is highly inelastic for all economies.

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Available at: http://www.cepii.fr/anglaisgraph/bdd/distances.htm (Access: February 28, 2012) Available at: http://data.worldbank.org/data-catalog/world-development-indicators (Access: February 28, 2012)

Technology plays a major role in determining the ability of a country to export. First, it influences countrys ability to produce agricultural goods and, second, it measures the ability of a country to provide the demanded infrastructure as a fundament of agricultural exports. To proxy technology, we use the GDP per capita, YNit, in Ukraine. The data for this variable was taken from the WDI databank and measured in US$. An increase in the GDP per capita variable represents an extended capability to produce agricultural goods and is a good proxy for countrys general technology level. Thus, we expect the sign of this endogenous variable to be positive and its magnitude to be strong. In our model, we use two different dummy variables for the impact of economic relations between countries. We included FSUij, for trade with the post-Soviet states7. The variable equals to 1 if both trading countries are former republics of the SU, and equals to 0 if this is not the case. This variable represents the impact of traditional and continuous trade relations on agricultural export trade. As the Soviet Union was highly integrated economically, we expect the sign of this variable to be positive and its magnitude to be large. Furthermore, we included a dummy variable to measure the impact of regional trade agreements (RTA). The economic space of the Commonwealth of Independent States (CIS) reflects such a plurilateral RTA and is a good proxy to measure the impact of post-Soviet regional economic integration. Therefore, we introduced CISijt, which equals to 1 if both countries are members of the CIS and to 0, if this is not the case. Data for the mutual adherence to the CIS are derived from the Regional Trade Agreements Information System (RTA-IS)8 of the World Trade Organization (WTO). The former member Georgia left the organization subsequently to the military conflict with Russia in 2009. We assume that Ukraines CIS-membership has a positive impact on its agricultural export trade. Thus, the magnitude is expected to be smaller than of the FSU dummy. This is due to the fact that the economic heritage of the Soviet Union plays a considerable role for the Ukrainian economy until today (STEINBACH, 2012). Estimation Methodology The structure of our panel set and the econometric model (Equation 4) suggest applying either a fixed effects model (FEM) or a random effects model (REM). Both regression models can handle cross-sectional and time series data. In this case study, we use the REM as it is able to catch the individual and the time effects in our data panel. The REM uses the weighted average of the estimates produced by the Between and Within estimators (WOOLDRIDGE, 2002). Therefore, we expect a higher explanatory power and more efficient estimators from our model. Rather than the ordinary least squares (OLS) method of estimation, the feasible generalized least squares (FGLS) method is applied in the REM (BALTAGI, 2005). Particularly data panels with huge N and small t benefit from the FGLS method as it yields more efficient and consistent estimators. To estimate the variance components, we apply the Swamy-Arora method (SWAMY and ARORA, 1972) for unbalanced panels, which was improved by BALTAGI and CHANG (1994). This yields a more reliable R-squared value. The REM assumes that the errors have the same variance across all observation points. Due to correlation between dependent and independent variables, we cannot prevent heteroscedastic estimators. Therefore, we apply the Huber-White-sandwich estimation method to receive a heteroskedasticity-robust variance estimator (STOCK and WATSON, 2008). We do not need to apply the Hausman specification test or the Breusch-Pagan Lagrange Multiplier (LM) test as we use a heteroscedasticity-consistent standard error model.
The post-Soviet states are in alphabetical order: Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. 8 Available at: http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx (Access: February 28, 2012)
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Empirical Results The collected data was inserted into processing software and both models were estimated for the period 1996-2009. The model i (AYit) used data for 139 countries with 1,292 observations, while the model ii (TLijt) was estimated for a data panel of 95 countries with 746 observations. FGLS regression brought the results listed in Table 1. Table 1: The Models of Agricultural Export Trade in Ukraine, FGLS Regression Results for the Period between 1996-2009
Model i Coefficient lnAYit TLijt lnYjt
2 2 2

Model ii t-Value (0.291) 0.368*** (0.074) (0.052) (0.024) (0.088) (0.395) (0.193) (2.734) (0.033) (0.187) (0.180) (0.347) (0.175) (7.082) 0.203*** -1.599*** 0.541*** 1.864*** 0.855*** 4.922* 0.458 746 Coefficient t-Value

-0.997** 0.307*** -1.623*** 0.949*** 1.882*** 1.053*** 27.332*** 0.483 1,292

lnDWij lnYNit2 FSUij CISijt

Constant R-squared Observations

* p < 0.05, ** p < 0.01, *** p < 0.001 Sources: Authors Estimations, Regression is Based on the Developed Gravity Data Sets

Both models yield consistent and efficient estimators. Model i explains more than 48.3 % of variance in the Ukrainian agriculture export trade, while the model ii is able to catch more than 45.8 % of variance in the data panel. According to the literature, models with an Rsquared value larger than 40 % are considered highly meaningful. All the parameters in model i are statistically significant (p < 0.01). The signs of all explanatory variables depict the real situation clearly. As expected, the weighted distance and the agriculture GDP have a negative impact on agricultural export trade flows. Partners GDP, the income per capita at home and the dummy variables positively affect Ukraines foreign sales. Likewise, model ii yields statistically significant estimator (p < 0.05). The weighted distance has a negative and all other explanatory variables a positive effect on the export flows. The estimated coefficient of DWij indicates the weighted distance effect of the economies and represents the costs to trade due to distance and spatial characteristics of each economy. It implies that a 1 % increase in the square of DWij decreases Ukraines agricultural exports by 1.62 %, and by 1.6 % in the model ii. Hence, Ukraines exporters of agricultural goods prefer to trade with countries nearby. This indicates the importance of transport costs for agricultural trade as the weighted distance effect is smaller for the whole Ukrainian economy, amounting to about -0.85 % (STEINBACH, 2012). The agricultural GDP variable, AYit, indicates the effect of an increase in Ukraines agricultural GDP. As expected, a 1 % increase in the square of the agriculture GDP reduces agriculture exports by 1 %. This confirms our assumption that a higher level of value added and an increase in the processing depth enlarge domestic demand for the Ukrainian food commodities. By contrast, the applied variable TLijt in the model ii implies that a 1 % increase in the ratio fosters agricultural export trade by 0.37 %. The
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variable, which measures the relative ability of a country to export goods on the basis of arable land and the mechanization level, has the expected sign and a lower magnitude than AYit. This confirms our claim that the measure is imperfect as it does not capture the value added by farms and industries processing raw agricultural materials. The explanatory variable Yjt indicates the wealth effect of the trading partner and the ability to purchase agricultural commodities. It implies that a 1 % increase in the square of Yjt increases agricultural export trade by 0.31 %, and by 0.20 % in the model ii. It points towards the high inelasticity in the demand of agricultural goods. By contrast, the development stage of Ukraine has a huge impact on agricultural exports. A 1 % increase in the square of the GDP per capita, YNit, increases the volume of Ukraines agricultural export flows by 0.95 %, and by 0.54 % in the model ii. This indicates the effect of technology due to an increase in the ability to produce agricultural goods. This impact is much stronger in the agricultural sector than in the whole economy, where the effect is about 0.26 % (STEINBACH, 2012). Therefore, an increase in technology affects Ukraines agricultural sector stronger than the total economy. This reflects the high demand for an increased investment in technology. In our model, we considered two different measures of economic relations between countries. The introduced dummy variables, FSUij and CISijt, turned out to be highly significant and to have a huge impact on the direction of Ukraines agricultural export trade. Traditional trade due to the mutual adherence to the economic space of the former Soviet Union positively increases the volume of exports by 656.66 %, and by 644.95 % in the model ii. This highlights the importance of traditional trade relations for Ukraines agriculture and confirms the results of other studies on countrys foreign trade. The effect of traditional trade relations is even stronger than it is for the whole economy (STEINBACH, 2012). The coefficient of a membership in a RTA, CISijt, confirms the assumption that economic integration of space via regional agreements positively affects the volume of trade between countries. Ukraines agricultural exports to CIS countries are higher by 268.62 % than exports to other partners, and by 235.14 % for the model ii. Summary and Concluding Remarks Recognizing the importance of the agricultural sector for the economic performance of transition countries, our study aimed in revealing the characteristics and analyzing the factors determining the agricultural export trade. For this reason, we applied an augmented gravity model to Ukraines trade partnerships, covering the period 1996-2009. We conducted the regression using a random effects model to catch time-effects in our data panel. This allowed us to include time-invariant dummy variables. To estimate the variance components, we used the Swamy-Arora method and we applied the Huber-White-sandwich estimator to obtain a heteroskedasticity-robust variance estimator. Therefore, our paper demonstrates that the random effects model generates the most reliable results, using rigorous econometric methods. According to our findings, Ukraines agricultural export trade follows the basic patterns of the gravity model. The results imply that the Ukrainian exports increase with the size of the trading partners GDP and decrease with the geographical distance. Therefore, it appears that it is more desirable for Ukraine to promote export to countries nearby, which have a relatively large GDP. A larger GDP reflects the consumption ability of a trading partner. Furthermore, the distance variable indicates that transport costs are crucial for the agricultural sector as the negative magnitude of the estimator is large. Thus, investment in infrastructure could increase the volume of agricultural foreign sales. The technology level in Ukraine has a positive impact on its agricultural exports. The estimated parameter points towards the relevance of a better access to modern types of mechanization and seeds as well as to human capital.
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To capture the characteristics of the domestic agricultural sector, related to the production capacity, we introduced two new measures. Both parameters improve the reliability of the gravity model as they give a better understanding of the patterns in the sector. Confirming our assumption, the agricultural GDP turned out to decrease and the second parameter to increase the trade volume. However, we conclude that the agricultural GDP parameter is a more reliable measure. This is because the number of observations is significantly reduced for the second proxy, due to missing data. The results point towards the impact of an increase in the value added in the Ukrainian agricultural sector. They also reveal the risks of an increase of price volatility, due to reduced exports. Further consequences are an increase in food insecurity and a high dependence of the EU on food imports from transition countries. The authors of this paper assume that the economic growth in transition economies will have strong impacts on the agricultural sector in the EU. Moreover, our major findings imply that agricultural exports tend to be higher to countries with which Ukraine has traditional trade relations. The magnitude of the effect is strong, even stronger than the effect of post-Soviet economic integration. It suggests that the common political, and thus economic, heritage promotes exports. For Ukraine, this increases the importance of promoting agricultural exports to those countries and of expanding the existing economic linkages. The common membership in a regional trade agreement encourages Ukraines agricultural export trade too. However, it is rather surprising that the magnitude of the estimator is comparatively small. Lastly, the findings point towards the importance of our gravity model of agricultural trade as a supportive instrument for the formulation of policy recommendations. However, recommendations cannot be based on the results of such estimation only; they need further underpinning by an in-deep analysis of the domestic characteristics of the exporting country. We assume that a more disaggregated analysis gives a better understanding of sub-sector specific characteristics. Bibliography
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WORLD BANK (2012). Indicators: Gross Domestic Product per Capita in Current US$. Available at: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD (Access: February 16, 2012). TRADE ORGANISATION (2012). Profiles: Ukraine. Available at: WORLD http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=UA (Access: February 20, 2012).

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