The Link between Trade and Income: Export Effect, Import Effect, or Both?

Shuo Zhang Department of Economics State University of New York at Fredonia Jan Ondrich J. David Richardson1 Department of Economics Syracuse University February, 2004 Abstract This paper presents a new framework to evaluate how cross-country differences in export openness and import openness separately affect the real per capita income levels. Instrumental variable estimation extracts the exogenous components of total trade and net exports, which imply distinct export and import effects. We use countries geography as an instrument for trade openness; and we build on demography and cross-border transfers to develop a novel instrument for net export openness. New estimates reveal that export alone correlates with income, not import. Ceteris paribus, countries with high export intensity (but not high import penetration) have high income per capita. Keywords: Export; Import; Trade; Income; Instrument JEL classification: F41; F43
1

Zhang: Department of Economics, E358 Thompson Hall, Fredonia, New York 14063; Tel.: 716-673 4671; Fax:

716-673 3332; zhangs@fredonia.edu. Ondrich, Richardson: Department of Economics, 110 Eggers Hall, Syracuse, New York 13244; Tel.: 315-443 2414; Fax: 315-443 3717; jondrich@maxwell.syr.edu; jdrichar@maxwell.syr.edu. All responsibility for errors remains with the authors.

I.

Introduction

Mercantilists believed that trade surpluses enriched a country, and implicitly that its government should encourage exports and restrict imports. Adam Smith and David Ricardo challenged mercantilism by arguing that overall openness is what mattersnations grow more prosperous through imports as well as exports. Many modern developing countries have replaced their strategy of government-protected import substitution industrialization with an export oriented strategy. This paper re-poses the question of whether trade openness raises a countrys income per person (or per worker); and if it does, what are the channels and mechanisms through which trade affects income, in particular through exports or through imports?2 We build on Frankel and Romer (1999) and Irwin and Tervi (2002). Their papers alleviated many of the conceptual and econometric barriers to these issues by showing how geographical characteristics provide an arguably good instrument for a countrys intrinsic openness in a cross section. Yet they admitted that their approach could not separate the import effect from the export effect.3 No one to our knowledge has yet figured a way to do what seems initially the most natural next thing. That is to construct a measure of export openness, then an arguably

Baldwin (2004) especially, but also Bosworth and Collins (2003) and OECD (2003) provided comprehensive

literature reviews. See also Zhang (2003).

3

Wei and Wu (2001) and Wei (2002a, 2002b) consciously followed similar leads in a study of how globalization

affects Chinese city-level growth and inequality. Wei conflated export and import influences by selecting Chinese cities distance to two major Chinese ports as his instrument for a citys natural openness. Hanson (2003), in somewhat the same spirit, found Mexican wages highest (ceteris paribus) in regions that are geographically and economically closest to the United States.

independent measure of import openness, and investigate whether one has a different effect on income across countries than the other, ceteris paribus. That is the principal objective of this paperto identify the separate influences of export openness and import openness on income levels across countries in 1990 (as well as in 1985, 1980, and 1975). In particular, we conceptualize and estimate an additional net trade effect on income levels. When combined with Frankel and Romers total trade effect, the two effects together imply separable export and import effects.4 We find that export openness correlates much more closely and strongly with a countrys living standards cross-sectionally than does import openness5. The rest of the paper is as follows. Section II describes the models and develops our approach, and Section III reports the empirical results. Section IV tests the robustness of the findings. Section V contains the conclusions of the paper.

II.

Empirical Specification

We develop a simple model based on Frankel-Romer (1999), separating their total trade share into export share and import share:
ln( y i ) = 0 + 1 X i + 2 M i + 3 Z i + i

(1)

where y i represents the real per capita income for country i. X and M are exports and imports scaled by real GDP. Z stands for other control variables.

Ondrich et al. (2002) explored the sensitivity of the Frankel-Romer approach to heteroscedasticity. Zhang (2003)

examined the issues of this paper in a panel approach; see also Greenaway et al. (2002).
5

Unfortunately, the instrumenting techniques that we develop for net trade cannot be easily implemented

bilaterally, so there remains some doubt about the exact conformity of our conclusions to Frankel and Romers.

There are two familiar problems with simply estimating equation (1). One is the demandside accounting relationship (Y = C + I + G + X M) coupled with the supply-side relation between overall supply Y and export supply X. Thus the key variables of interest are mutually endogenous. The second problem is that export openness and import openness are highly correlated across countries, as every general-equilibrium thinker knows. And Country As exports to country B are country Bs imports from country A. So both measures of openness are endogenously related to each other and to income (per capita), the focus variable on which they are thought to operate.6 Confronting these challenges, whats a researcher to do? Instrumental variable estimation provides a theoretically appealing way to handle the endogeneity problem. The important practical question posed in this study is how to find two sets of instruments that can not only capture the exogenous components of exports and imports but also distinguish the export effect from the import effect. This paper proposes an alternative approach to distinguishing the effects of imports and exports in the spirit of instrumental variables that meet the challenge of endogeneity. Consider algebraically re-arranging equation (1). Let T be total trade (exports plus imports) divided by real GDP and let E be net trade (exports less imports) divided by real GDP (to control for scale effects). Equation (1) transforms to
ln( y i ) = 0 + 1Ti + 2 E i + 3 Z i + i .

(2)

We argue that finding good instruments for T and E in order to estimate equation (2) across countries is much easier than finding good instruments for X and M in order to estimate

Focusing on the cases of Japan and Korea, Lawrence and Weinstein (2001) found that imports rather than exports

are the conduit of faster productivity growth. However, we are not confident that they adequately addressed the problem of reverse causation.

equation (1) cross-sectionally. Part of our approach rests on a comparison of Figures 1 and 2. In Figure 1, the average export share from 1970 to 1998 is plotted against the average import share from 1970 to 1998. The World Development Indicator 2000 data cover 174 countries. The figure exhibits an unsurprising strong positive relationship between export share and import share (with a correlation of 0.85). In Figure 2, the sum of the export share and the import share is plotted along the vertical axis. Along the horizontal axis, we plot the difference between the export share and the import share. The chart shows no evident relationship between the two variables in the long run (the correlation is equal to -0.13.) Frankel and Romer (1999) have already provided good candidates to instrument for total trade share. The major contribution of this paper is to propose instruments for the net trade share variable that capture cross-country differences in remittances and in borrowing and lending behavior, and the demographic and asset/portfolio variables underlying such behavior. Since T = X + M and E = X M, our estimation approach will shed implicit light on the distinctive export effect and the distinctive import effect.7

A.

Bilateral Trade Regression We adapt the approach and data of Frankel and Romer (1999), as updated by Frankel and

Rose (2002), to employ geographical characteristics of countries as attractive cross-sectional instruments for total trade based on the gravity model of bilateral trade. We accept their demonstration that countries geographical features do affect their trade, but are not affected by their incomes, by government policies, or by other factors that influence income.

We also further refine the Frankel-Romer model with a heteroscedasticity correction described briefly below and

in more detail in Zhang (2003).

We follow their specification exactly, including the usual gravity-equation variables, as well as indicators of landlocked status and common language and borders. We refine their approach slightly, due to the possibility of heteroscedasticity. We use weighted least squares estimation based on the procedure proposed by Harvey (1976). As in Frankel and Romer (1999), the predicted value of the overall trade share T for country i is aggregated from the predicted values of the bilateral trade shares between country i and all her trading partners.8

B.

Net Trade Regression Our main task in this paper is to replace net trade (E) with determinants in the spirit of

instrumental variables, then to infer separate export and import effects from this and the FrankelRomer approach. While aspects of the time-series relationship between net exports and income are well-established, e.g., its cyclicality, the cross-section relationship is not. What kind of national and international variables determine which countries have overall trade surpluses and which have overall trade deficits? What variables determine bilateral net exports between two countries? And are those cross-sectional determinants suitable for first-stage instruments in the current study, or do they too vary cross-sectionally with income levels? This sub-section aims to answer. To begin, a countrys current account balance consists of three parts: (1) the balance of trade in goods and servicesour E; (2) net rents, interest, profits and dividends represented as rB where B (-B) is the net foreign investment position (a stock variable) that earns (pays) yearly interest at some appropriate interest rate r; (3) transfer payments TP such as foreign workers

See some details of the procedure in Appendix A1 and more in Zhang (2003).

remittances. In the open economy, the current account balance is also determined by the savinginvestment gap (S I), inclusive of government savings/dissavings. Changes in official reserves R may offset any surplus or deficit in the overall balance of the capital account KA and the current account CA.
CA = E + rB + TP = S I = R KA .

(3)

In principle, equation (3) describes both overall and bilateral current-account balances. Bilateral empirical implementation of our approach unfortunately founders on data limitations. (Few nations or global data-collection agencies publish more than a handful of the variables in equation 3 on a bilateral basis, including the current account itself.) It is clear that we can re-write equation (3) to conceive of E as determined crosssectionally by S, I, r, B, remittances, and reserve changes. Though S, I, and possibly r are also correlated with income levels, and hence endogenous, transfer payments and reserve changes are less likely to be. And there are at least some deeper determinants of S and I themselves that might qualify as good instrument candidates, especially in financially open economies. With respect to S and I, in a closed economy with zero international capital movement, saving is equal to investment. Economic growth depends on both saving and investment directly. As countries open up, however, domestic investment is financed by the worldwide pool of savings, while domestic saving seeks the highest returns in the global capital market. When domestic saving is not sufficient to finance domestic investment, such as in the U.S., the difference is made up by foreign savings. When domestic saving exceeds domestic investment, such as in Japan, the extra savings are invested abroad. Higher saving is associated with capital outflow and lower saving indicates capital inflow. Thus, while investment remains as a direct determinant of countries income level in the open market scenario, global borrowing and

lending implies that domestic saving alone is arguably detached from its closed-economy influence on income.9 That in turn makes domestic saving or its deeper determinants reasonably good candidates to instrument for net trade (E). Though there is well-known skepticism over how open world capital markets really are,10 almost all commentators agree that the degree of international capital mobility has increased significantly, especially during the last 20-25 years. The widespread removal of capital controls in the industrial countries enhanced financial integration. The financial sector reforms and the opening up of the capital account to private capital inflows help to create lower and lower correlation between domestic saving and investment, even in developing countries.11 High capital mobility allows us to use saving or factors that determine saving as instruments for net trade or current account balance.12 Yet the relationship between saving and net trade or current account balance reflects a complex interaction of households, firms, and governments both at home and overseas. A random shock specific to the net trade balance could

See Kraay and Ventura (2002) for an up-to-date treatment and corresponding literature. Feldstein and Horioka (1980) originated the skepticism. See Zhang (2003) and Kraay and Ventura (2002) for a

10

review.
11

With less diversified production and export structures, oil-exporting countries and small countries tend to have an

especially low saving-investment correlation.

12

Glick and Rogoff (1995) showed that country-specific shocks rather than global productivity shocks are important

determinants of current account fluctuations. Empirical work extended dynamic optimizing models proposed by Ghosh (1995) and Ghosh and Ostry (1995) to the open economy context (Razin 1995; Obstfeld and Rogoff 1996). From a saving-investment perspective, Debelle and Faruqee (1996) investigated the determinants of current account using the structural approach. Holding level of investment constant, countries with a higher saving rate tend to be net exporters and net importers had a lower saving rate.

potentially affect a countrys saving ratio.13 In order to avoid these new endogeneity problems, we propose countries demographic characteristics as more fundamental and cleaner instruments for net traderecognizing that differences of saving between two countries can be very well explained by their differences in demography. Demography matters in both age structure and in steady-state population growth. With regard to the former, life cycle models in an intertemporal approach suggest that net trade balance is the outcome of forward-looking dynamic saving and investment decisions. People save during the earning span at productive ages and dissave when they are young or old. Thus, aggregate national savings will be relatively high if the size of the dependent population is low compared to the size of the working-age population. High savings build up domestic and foreign assets, reflected in a large net trade surplus. In the cross-sectional context, the real growth of output (GDP) is expected to have a positive impact on the net trade balance due to the fast growing supply in the global market. We use the population growth rate as the proxy for the real growth of output to capture the impact. Urbanization is also a deeper fundamental determinant of saving, like demography, and is less likely than saving itself to be subject to feedback influences from exogenous shocks to income. The trend toward urbanization leads to a lower private saving rate because precautionary saving is less necessary.14 An important determinant of the net trade balance is the net interest and investment income from abroad. A country can run a steady-state trade deficit equal to her investment

13

For instance, governments tend to adopt contractionary fiscal policy to prevent sustained large capital flows when

their countries are in trade deficit.

14

Edwards (1996); Loayza et al. (2000).

income, ceteris paribus. Any deterioration in investment income requires improvement in the trade balance. Likewise, international reserves flow into the home country when it exports and flow out of the home country when it imports. Ceteris paribus, a country can run a steady-state trade deficit equal to its decline in official reserves. Finally, net current transfers from abroad, such as workers remittances, are an important source of foreign exchange for many countries that can finance trade imbalances. The net trade balance is also influenced by a countrys relative price of tradeable output to non-tradeable output (compared in turn to the comparable world price ratio). The higher is a nations relative tradeables price (by world standards), the larger will be its relative output of both exportables and import substitutes, output that gets exported in the first instance and displaces imports in the second (Obstfeld and Rogoff 1996, pp. 199-257.) Yet there is no obvious reason why a nations income level should vary systematically with this relative price, because every nation produces both tradeables and non-tradeables and earns income from both.15 To summarize, we believe the following equation to represent a strong, exogenous prediction of net exports:
E i = 0 + 1 dep i + 2 popg i + 3 oil i + 4 urpop i + 5 nii + 6 dres i + 7 relp i + 8 nct i .

(4)

15

One could object that several of these variables, e.g., net remittances or returns on cross-border capital placement

are co-determined endogenously with net exports (E) as part of the deeper fundamentals of current account behavior

how the current account sum of all of them, E, remittances, capital income, responds to shifts and shocks to
output, investment prospects, and government spending needs (Obstfeld and Rogoff 1996, pp. 74-116). We agree, but can think of no feasible measures of global and country-specific productivity and fiscal shocks that could serve as deeper, more fundamental instruments than those we choose. Furthermore, we think this objection relates more to net capital income and flows of official reserves than to remittances.

10

The dependent ratio dep is calculated as the proportion of people under age 14 or over age 65. popg stands for the population growth rate. oil takes the value of 1 if country i depends heavily on oil revenues as her main source of income.16 urpop is defined as the percentage of the total population living in an urban location. ni is the stock of net investment income from abroad as a ratio of GDP, measured in year 1990. It captures the term rB in equation (3). dres denotes changes in net official reserves as a ratio of GDP. Price relative (relp) is measured as the ratio of ratios of export prices to GDP deflators from 1985 to 1990. nct represents current transfers (from abroad), such as migrants remittances, scaled by GDP.

C.

Income Regression The last step in re-asking the Frankel-Romer question, and in decomposing the effect of

openness on per capita income into an export and an import effect, is to use the predicted values for the total trade share (T) and net export share (E) variables from sub-sections A and B as instruments in regression equation (5), and to estimate it across countries:
ln( y i ) = 0 + 1Ti + 2 E i + 3 ln( pop i ) + 4 ln(area i ) + u i

(5)

where the disturbance ui represents all the uncertain factors that may also affect the level of the real per capita income. The size of the coefficients on T and E determine if exports or imports are correlated more closely across countries with per capita output.

16

The dummy variable for oil exporting countries (primarily Gulf States) is included to capture several unique

phenomena. One is the unusually low savings-investment correlation described in note 12; another is strikingly large intra-regional and international migration. The dummy variable for oil exporting countries is expected to be positive since these countries typically have a more favorable current account position on average (Chinn and Prasad 2003).

11

 ln( y i ) = 0 + ( 1 + 2 ) X i + ( 1 2 ) M i + 3 ln( pop i ) + 4 ln(area i )

(6)

where 1 + 2 measures the predicted partial effect of exports on per capita income and 1 2

measures the predicted partial effect of imports on per capita income, holding the size of countries constant. The relative importance of exports and imports depends on the sign and

magnitude of 1 and 2 estimated for equation (6). The estimation results are shown in Section III (data are described in the appendices).

III. A. Bilateral Trade Regression

Estimation Results

We start by testing for heteroscedasticity in the Frankel-Romer (1999) bilateral trade regression by running the Breusch-Pagan test on a regression of log squared OLS residuals on the bilateral trade regressors. The resulting test statistic of 88.38 is highly significant statistically (p value = 0.0001). Accordingly, the null hypothesis of homoscedasticity is rejected. We therefore use the weighted least squares (WLS) approach proposed by Harvey (1976), where the
2 square of the weight (error variance ij ) is constructed as the exponential function of the

2 predicted ln eij . All the variables in the regression are weighted by the inverse of the square root

of the variance. WLS regression results in Table 1 reveal a positive and statistically significant relationship between bilateral trade and countrys geographic characteristics. All else being equal, large distance leads to less trade. If the official languages in country i and country j are the same, trade rises by 55 percent. Two countries that share a border trade 62 percent more than countries pairs which do not. Landlocked countries tend to trade less due to high transportation

12

costs. A significant portion of the variation of the bilateral trade share is explained by the estimated equation. The Frankel-Romer results are thus confirmed, using a larger sample.17

B.

Net Trade Regression

The results of this paper rest crucially on our approach to net exports. The net exports regressions are estimated for eight different sets of variables to control for countries demographic characteristics and cross-border transfers features. Table 2 provides the results of the estimation based on equation (5). The results of the first specification indicate that an increase in the age dependency ratio leads to a reduction in net trade, as expected. The impact of population growth rate is positive but not significant. Controlling for countrys demography, oil-exporting countries do tend to have a higher net trade share relative to non-oil-exporting countries. The second specification adds the urban population ratio variable. The urban population ratio is positively related to the net trade balance at a 10% significance level, as opposed to our hypothesis. Alternative specifications exclude the urban population ratio from the regression; the results for other coefficients remain largely unchanged. In specification (3), we emphasize financial-transfer factors alone. As expected, net investment income from abroad has a significant and negative impact on net export share. Changes in reserves and the relative price of tradeables do not appear to play a major role in
17

Data on bilateral trade are only available for 62 countries in the Frankel and Romer (1999) study. Based on the

coefficients estimated from the gravity model, Frankel and Romer imputed the bilateral trade share for country pairs whose recorded trade share is missing. The quality of the instruments and the precision of the estimated effects are brought into question especially if the gravity relation is systematically different for countries in the sample than for countries added through imputation.

13

determining the trade balance, possibly because of the non-market forces in some planned economies that make it difficult for international trade flows to adjust to changes in market conditions. Net current transfers are statistically significant in explaining the trade balance. A one percentage point increase in net current transfers is associated with a 1.14 percentage point decrease in the net trade share balance. In specifications (4) to (8), we combine the two sets of instruments, demographic and financial. These specifications differ in two aspects: (i) whether or not the urban population ratio included; (ii) the two alternative measures of current transfers considered (current transfers from abroad and net workers remittances.) In most cases, countries net exports balance significantly improves with the lower dependency ratio, higher urban population ratio, lower net income from abroad, or lower net current transfers. These findings are consistent with our hypothesis. Alternative measures of net current transfers do not seem to alter the results. The binary variable for oil-exporting countries is associated with the net trade balance at the 1% significance level, while we do not find a significant relationship between countries trade balance and the population growth rate, changes in reserves, or the relative price of tradeables. The various specifications predict between 14% and 80% of the overall variation in the net export share.

C.

Income Regression

In order to cope with the simultaneity between openness and income, the income equation is estimated using instruments for total and net trade that come from geography, demography, and cross-border transfers, as described in the previous two sub-sections. The objective of this sub-section is to test whether, after controlling for the size of the economy, total

14

trade openness and net trade openness contribute to explaining cross-country differences in the level of real per capita income. To investigate the quality of the instruments, the scatter plot matrices in the eight panels of Figure 3 visually identify the relationship between the trade variables and their predicted values. Next to the correlation matrices, numerical values of the correlations are displayed in the correlation tables. Overall, Figure 3 shows that total trade share is positively linked with the aggregation of the estimated bilateral trade equations; correlations range from 0.53 to 0.77. Regarding net exports, we find that the actual values are in general positively correlated with predicted values, with correlations ranging from 0.51 to 0.90. Considerable information about countries overall trade and trade balance is provided by the predicted values with no apparent outliers. The correlation between the total trade share and the net trade share, as well as the correlation between the predicted total trade share and the predicted net trade share, are weak and nonlinear, as desired, implying that collinearity is probably not a problem, again as desired. Table 3 presents eight two-stage least squares estimation results for the link between openness and per capita income, one for each of the eight specifications of the first stage net trade balance estimation. The first column reports OLS estimation results that serve as a benchmark. The primary focus of this table is the coefficient estimates of the total trade share and net trade share. When controlling for the size of the economy, we find that higher levels of the net trade share only are typically linked with more per capita income. The size of countries, as measured by population and area, has an insignificant effect.18 Table 3 shows that these regressions account for 28 to 60 percent of the cross-country variation in per capital real GDP.

18

This suggests that the main influence of geography on income is through the channel of international flows of

goods and services, rather than the within-country trade.

15

The main results on the coefficients estimates for T and E from Table 3 are isolated in Table 4. An F-test is used to find the joint significance of the coefficients on T and E. The test statistics reject the hypothesis that both coefficients in row 1 and 2 are zero, supporting that the per capita income is associated with both the total trade share and the net trade share. Implied coefficients for the separate effects on per capita income of export openness and import openness appear in the last two rows. Coefficients of X in row 4 are the sum of the row 1 coefficients on T and the row 2 coefficients on E. Coefficients of M in row 5 are the difference between the row 1 coefficients on T and the row 2 coefficients on E. The corresponding standard errors for the coefficient sums/differences are computed and recorded in the parenthesis. The coefficients for X change moderately across the eight specifications, but remain positive and highly significant. The coefficients for M are negative and marginally significant. Table 4 leads to three main conclusions. First, the more generally open a country, the higher per capita income, ceteris paribus (the Frankel-Romer conclusion).19 Second, import openness alone is either uncorrelated with per capita income, or negatively correlated.20 To put the point quantitatively, comparable and equally open countries by the Frankel-Romer
19

The combined export-openness and import-openness effect in the expanded model of this study (approximately

0.01) appears to be much smaller than the trade-openness effect estimated in Frankel and Romer (1999) and Ondrich et al. (2002) (approximately 1 to 2). Frankel and Romer (1999), as well as Ondrich et al. (2002), divided both the actual and the constructed trade share by 100, which causes the discrepancy. The interpretation of the coefficient estimates remains consistent, even though it depends on how the trade share variable is scaled. An increase in Tfr, i.e., (X + M) / 100, of one percentage point is associated with a 1 percent increase in income per person. An increase in (X + M) of one percentage point is associated with a 0.01 percent increase in income per person.
20

Very similar results emerge implicitly from Miller and Upadhyays (2000)s study of the effect of openness on a

countrys total factor productivity (intimately related, of course, to its income per person). Their trade orientation measure, based on the countries deviations from Purchasing-Power-Parity exchange rates proxies for import shares.

16

measurebut that differ between themselves in X-openness and M-opennesshave different per capita GDP; those that are 1 percent more X-open than M-open have approximately 0.1 higher GDP per person. Third, the positive export openness effect is greater than the negative import openness effect in all cases.

IV.

Robustness Tests

To test the reliability of the empirical findings, Section III estimations are carried out for year 1975, 1980, and 1985. The first stage bilateral trade regression is specified as outlined above and in Frankel and Rose (2002). Instruments used in the first stage net trade share regressions correspond to specifications (1) through (8) in Table 2. Coefficients and standard errors for all openness indicators are summarized in Tables 5, 6, and 7.21 Each table is in the style of Table 4. The results demonstrated are mostly stable in significance and quantitatively similar across different time periods. Given the exclusion of numerous economies for which data are not available at the bilateral level, the 1975 cross-section estimates appear to be less precise. The main results in Section V are confirmed. The export share variable retains its magnitude, sign, and strong significance. The finding suggests that export is the primary path through which openness determines income. This is consistent with typical empirical estimates in the export-led-growth literature. The estimated import share continues to indicate the weak association between import and income. The sign of the coefficient is negative, suggesting that imports may undermine the overall effectiveness of openness and globalization.

21

The first stage regression results for year 1975, 1980, and 1985 are available upon request.

17

V.

Concluding Remarks

How does openness correlate with per capita income? And does it matter whether its indicator is export openness or import openness? The main contribution of this study is the development of an integrated two-stage framework to these questions, as described below:
Exports Cross-border Transfers Net Trade Geography Total Trade Income Demography 1st stage 2nd stage 2nd stage 1st stage Imports

We develop instruments to estimate cross-sectionally both the export-income linkage and the import-income linkage. To address the simultaneity problem, we employ an instrumental-variable approach to cross-country variations in the overall trade share, relying on geographic factors, as others have done, and to cross-country variations in the net trade share (exports minus imports), emphasizing demography as well as cross-border financial transfers. The influence of export openness and import openness on income is inferred through the interaction of the total trade effect and the net trade effect. Our cross-sectional estimation indicates a positive correlation between export openness and income levels. Import openness correlates negatively with countries incomes, however, though significantly different from zero in only half our runs. When significant, the negative import openness effect is always quantitatively smaller than the positive export openness effect. Taken together, this leads the total-trade-openness effectexport openness plus import opennessto be positive, which is in line with the empirical predictions from other research in this genre.

18

In a provisional panel extension of this paper, Zhang (2003) found that the exogenous components of export openness are positively associated with income levels and are highly significant after controlling for possible reverse causality from income to exports. The import openness effect is positive and insignificant most of the time (whereas it is often negative in the cross-sections). The favorable export effect is larger than the favorable import effect, when significant.

Appendix A1 Two-Step Procedures

The instrumental variable analysis for the total trade share in this paper is generalized into the following two steps:

A1.1

Step I ---- Bilateral trade regression

In step I, we regress the log bilateral trade share (tij) on countries geographical features represented by distance (distij), trading partners population (popj), product of areas (areaiareaj), common language dummy (langaugeij), common border dummy (borderij), and landlocked dummy (landlockedij).
ln t ij = ln( ij / GDPi ) = ' X ij + eij = a0 + a1 ln(dist ij ) + a2 ln( pop j ) + a3 ln(areai area j ) + a4languageij + a 5 borderij + a 6 landlocked ij + eij .
2 where eij = ln t ij ' X ij , eij ~ N (0, ij ) .

(a1)

19

Harveys (1976) procedure is used to correct for heteroscedasticity. We assume that the variance of the disturbance term eij in equation (a1) takes the following form:
2 ij = exp( 'X ij ) .

(a2)

The estimator of is the OLS estimator

= X ij X ij ' i j
1

X
i j

ij

2 ln(eij ) ,

(a3)

of the coefficient vector in the regression

2 ln (eij ) = 'X ij + ij

(a4)

2 where eij is the square of the residual resulting from the OLS regression of equation (a1) and ij

is the disturbance term.

A1.2

Step II ---- Total trade construction

In a heteroscedastic model, one should use nonlinear least squares regression to estimate

in
t ij = exp( ' X ij ) exp(a' X ij ) + u ij , and set (a5)

ij = exp( ' X ij ) .
The predicted overall trade share for country i is:
Ti = ij exp(a ' X ij ) .
i j

(a6)

(a7)

See Zhang (2003).

A2

Data Description

20

A2.1

Bilateral Trade Data Set

The bilateral trade data are obtained from Andrew Rose web site. This data set includes bilateral trade shares, distance between countries, population, area, a common-language dummy variable, a common-border dummy variable, and a landlocked dummy variable for 186 countries in year 1990. Roses original source for the trade data is the World Trade Database and United Nations International Trade Statistics Yearbook. The population and real GDP per capita data come from Penn World Table 5.6. Area data are from the World Reference Atlas. The information for the distance and common language dummy variable is from the Central Intelligence Agency (CIA)s web site.

A2.2

Net Trade Data Set

The net trade data including exports, imports, GDP, population aged 0-14, population aged 65 and above, total population, population growth rate, net income, changes in net reserves, GDP at market prices, official exchange rate, and current transfers are taken from World Banks World Development Indicator 2000. Net income from abroad includes the net labor income and net property entrepreneurial income components of the system of national accounts (SNA). Changes in net reserves are the net change in a countrys holdings of international reserves resulting from transactions on the current, capital, and financial accounts. The net current transfers take three forms. The net current transfers from abroad comprise transfers of income between residents of the reporting country and the rest of the world that carry no provisions for repayments. The net current transfers are recorded in the balance of payments whenever an economy provides or receives goods, services, income, or financial items without a quid pro quo.

21

The third measure comes from the net workers remittances as recorded by International Monetary Funds Balance of Payments Statistics. The relative price of tradeables is calculated based on the data obtained from the World Banks World Table. We define the price relative as the 1990 to 1985 ratio of export-to-GDPdeflator price indices. Since the export price index is in terms of the 1987 current US dollars while the GDP deflator is in 1987 local currencies, we create an exchange rate index for both year 1990 and year 1985 to adjust the prices into the same currencies. In particular,
(exchange rate index) t = (exchange rate) t 100 (exchange rate)1987

(a8)

where t refers to year 1985 or 1990. Therefore, 1990 to 1985 ratio of export-to-GDP-deflator price indices
(export price index) 1990 (GDP deflator)1990 /(exchange rate index) 1990 . = (export price index) 1985 (GDP deflator)1985 /(exchange rate index) 1985

(a9)

The data on the official exchange rate are taken from the World Development Indicator 2000. Oil-exporting country list includes eleven OPEC member countries (Algeria, Libya, Nigeria, Indonesia, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates), additional Gulf Cooperation Council countries (Oman, Bahrain), and other non-OPEC oil producing countries (Russia, Norway, Mexico).

A2.3

Income Data Set

Data on trade, GDP, population, and area for the income regression are also taken from the Andrew Rose web site. This data set consists of the year 1990 observations for 210

22

countries from the World Development Indicators 2000, merged with data from the Penn World Table 5.6.

A3 A3.1

Summary Statistics for the Total Trade Share Regression General Statistics
Obs. 10940 13264 11034 14746 14750 14746 14746 Mean 0.005 4667.31 57986.14 8.86e+11 0.12 0.02 0.19 Std. Dev. 0.025 2735.97 168141.90 6.41e+12 0.32 0.14 0.41 Min 5.31e-09 19.43 40 1883 0 0 0 Max 0.793 12351.26 1133683 2.08e+14 1 1 2

Variable bilateral trade share distanceij populationj areai areaj languageij borderij landlockedij

A3.2

Variable Description
Description Bilateral trade value divided by real GDP The great circle distance between the principle cities of country i and j Country js population in 000s Product of real areas. 1 for common official language between country i and j 1 for common land border between country i and j Number of landlocked countries in pair (0, 1 or 2)

Variable bilateral trade share distanceij populationj areai areaj languageij borderij landlockedij
Data source: Frankel and Rose (2002).

A4 A4.1

Summary Statistics for the Net Trade Share Regression General Statistics
Obs. 145 179 196 206 196 168 148 116 96 142 91 Mean -7.01 40.01 1.89 0.08 50.69 -1.40 -1.24 1.00 3.57 5.60 1.41 Std. Dev. 17.63 6.71 1.64 0.27 23.75 11.51 4.05 0.40 10.78 10.45 4.90 Min -199.46 26.98 -4.87 0 5.2 -30.62 -19.87 0.14 -22.82 -26.86 -10.70 Max 26.84 52.11 14.12 1 100 74.74 20.95 3.05 81.29 64.03 27.24

Variable Net trade share Age dependency ratio Population growth rate Oil-exporting countries Urban population ratio Net income from abroad Changes in reserves Relative prices Net current transfers from abroad Net current transfers Remittances

23

A4.2

Variable Description
Description 1990 Net trade divided by real GDP 1990 Population aged 0-14 + population aged 65 and above (% of total) 1990 Population growth (annual %) 1 for OPEC, Abab-OPEC, and non-OPEC countries 1990 Urban population (% of total) 1990 net income from abroad (% of GDP) Net changes in reserves (% of GDP) 1990 to 1985 ratio of export-to-GDP-deflator price indices 1990 net current transfers (% of GDP) 1990 net current transfers from abroad (% of GDP) 1990 Workers remittances (% of GDP)

Variable Net trade share Age dependency ratio Population growth rate Oil-exporting countries Urban population ratio Net income from abroad Changes in reserves Relative prices Net current transfers Net current transfers from abroad Remittances

Data source: Frankel and Rose (2002). World Development Indicators 2000. International Monetary Fund Balance of Payments Statistics World Bank Table.

A5 A5.1

Summary Statistics for the Income Regression General Statistics

Obs. 115 145 145 115 210 Mean 4913.78 80.67 -7.01 39177.84 631418.7 Std. Dev. 4945.33 63.57 17.63 134104.40 1813066 Min 399 13.62 -109.47 40 2 Max 18054 538.674 26.84 1133683 1.71e+07

Variable Per capita GDP Total trade share Net trade share Population Area

A5.2

Variable Description
Description Real per capita GDP chain index Total trade divided by real GDP Net trade divided by real GDP Population in 000s Area in sq. km.

Variable Per capita GDP Total trade share Net trade share Population Area
Data source: Frankel and Rose (2002). World Development Indicators 2000.

Bibliography

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Bosworth, B., Collins, S.M., 2003, The Empirics of Growth: An Update. Manuscript. The Brookings Institution, Washington, D.C.. Chinn, M., Prasad, E.S., 2003, Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration. Journal of International Economics 59(1), 47--76. Debelle, G., Faruqee, H., 1996, What Determines the Current Account? A Cross-Sectional and Panel Approach. International Monetary Fund Working Paper No. 96/58. Edwards, S., 1996, Why Are Latin Americas Savings Rates So Low? An International Comparative Analysis. Journal of Development Economics 51(1), 5--44. Feldstein, M., Horioka, C., 1980, Domestic Saving and International Capital Flows. The Economic Journal 90(358), 314--329. Frankel, J.A., Romer, D., 1999, Does Trade Cause Growth?. American Economic Review 89, 379--399. Frankel, J.A., Rose, A.K., 2002, An Estimate of the Effect of Common Currencies on Trade and Income, Quarterly Journal of Economics 117(2), 437--466. Ghosh, A., 1995, International Capital Mobility Amongst the Major Industrialized Countries: Too Little or Too Much?. The Economic Journal 105, 107--128. Ghosh, A.R., Ostry, J.D., 1995, The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach. World Bank Economic Review 9, 305--333.

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Glick, R., Rogoff, K., 1995, Global versus Country-Specific Productivity Shocks and the Current Account. Journal of Monetary Economics 35, 159--192. Greenaway, D., Morgan, W.C., Wright, P.W., 2002, Trade Liberalization and Growth in Developing Countries. Journal of Development Economics 67(1), 229--244. Hanson, G., 2003, What Has Happened to Wages in Mexico Since NAFTA?. National Bureau of Economic Research Working Paper No. 9563. Harvey, A.C., 1976, Estimating Regression Models with Multiplicative Heteroscedasticity. Econometrica 44(3), 461--465. Irwin, D.A., Tervi, M., 2002, Does Trade Raise Income? Evidence from the Twentieth Century. Journal of International Economics 58(1), 1--18. Kraay, A., Ventura, J., 2002, Current Accounts in the Long and the Short Run. National Bureau of Economic Research Macroeconomics Annual 2002, Cambridge, Massachusetts, pp. 65--112. Lawrence, R.Z., Weinstein, D.E., 2001, Trade and Growth: Import-led or Export-led? Evidence from Japan and Korea, in Stiglitz, J.E., Yusuf, S. (Eds.), Rethinking the East Asian Miracle. Oxford University Press, Oxford. Loayza, N., Schmidt-Hebbel, K., Serven, L., 2000, What Drives Private Savings Across the World?. The Review of Economics and Statistics 82(2), 165--181 Miller, S.M., Upadhyay, M.P., 2000, The Effects of Openness, Trade Orientation, and Human Capital on Total Factor Productivity. Journal of Development Economics 63, 399--423.

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Obstfeld, M., Rogoff, K., 1996. Foundations of International Macroeconomics. Massachusetts Institute of Technology Press, Cambridge, Massachusetts. OECD (Organization for Economic Cooperation and Development), 2003, The Sources of Economic Growth in the OECD Countries, Paris. Ondrich, J., Richardson, J.D., Zhang, S., 2002, Further Investigation of the Link between Trade and Income. Working Paper, Syracuse University. Razin, A., 1995, The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence, in Kenen, P. (Eds.), Understanding Interdependence: The Macro-economics of the Open Economy. Princeton, New Jersey. Wei, S., 2002a, Is Globalization Good for the Poor in China?. Finance and Development 39(3), 26--29. Wei, S., 2002b, China as a Window to the World: Trade Openness, Living Standards and Income Inequality, in Gruen, D., OBrien, T., Lawson, J. (Eds.), Globalization, Living Standards and Inequality. Reserve Bank of Australia and Australian Treasury, Canberra, pp. 109--117. Wei, S., Wu, Y., 2001, Globalization and Inequality: Evidence from Within China. National Bureau of Economic Research Working Paper No. 8611. Zhang, S., 2003, Three Essays on the Empirical Linkage between Trade and Income. Unpublished Doctoral Dissertation, Syracuse University.

27

Table 1: Bilateral Trade Share and Geography, 1990

Dependent variable: ln (bilateral trade share) Ln (distanceij) -1.21*** (0.03) Ln (populationj) 1.01*** (0.02) -0.29*** Ln (areai areaj) (0.01) 0.55*** Languageij (0.08) Borderij 0.62*** (0.15) Landlockedij -0.70*** (0.06) Constant -0.58* (0.33) Number of Observations 8104 R2 0.41 SE of regression 2.28
Standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

28

Table 2: Net Trade Share, Demography, and Cross-Border Transfers Characteristics, 1990
(1) -0.73** (0.28) 0.93 (1.59) 14.39*** (4.64) Dependent variable: net export share (2) (3) (4) (5) -0.34 -0.06 0.09 (0.36) (0.15) (0.18) 0.60 -0.89 -1.02 (1.59) (0.82) (0.82) 12.16** 4.26** 3.56* (4.79) (2.09) (2.12) 0.13* 0.05* (0.07) (0.03) -0.79*** -0.64*** -0.59*** (0.10) (0.14) (0.14) -0.35* -0.16 -0.16 (0.19) (0.17) (0.17) -0.43 0.23 0.47 (1.64) (1.35) (1.35) -1.14*** -1.03*** -1.02*** (0.10) (0.10) (0.10) (6) -0.65*** (0.19) 1.52 (1.14) 8.10*** (2.39) -0.69*** (0.19) -0.45* (0.24) -2.36 (2.10) -0.70*** (0.13) 22.30** (9.94) 134 0.14 14.43 -0.64 (16.08) 134 0.16 14.33 -2.31 (1.73) 113 0.78 6.85 2.04 (5.34) 106 0.73 5.50 -6.84 (7.49) 106 0.73 5.45 21.01*** (6.57) 70 0.69 5.42 (7) -0.43** (0.22) 1.51 (1.11) 6.86*** (2.40) 0.08** (0.04) -0.58*** (0.19) -0.45* (0.24) -2.10 (2.05) -0.68*** (0.13) 7.91 (8.87) 70 0.71 5.28 -0.84*** (0.28) -13.85 (17.12) 67 0.52 8.27 (8) 0.13 (0.41) -2.23 (2.10) 9.28** (3.61) 0.15* (0.07) -0.67** (0.26) 0.15 (0.34) -0.52 (2.74)

Dependency ratio Population growth rate Oil-exporting countries Urban population ratio Net income from abroad Changes in reserves Relative price Net current transfers Net transfers from abroad Net remittances Constant Number of Observations R2 SE of regression

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

29

Table 3: Total Trade Share, Net Trade Share, and Per Capita Income, 1990
OLS 0.005*** (0.002) 0.029*** (0.009) 0.10 (0.08) -0.06 (0.07) 7.57*** (0.77) 110 0.23 0.95 Dependent variable: ln (per capita real GDP) IV(1) IV(2) IV(3) IV(4) IV(5) 0.004 0.004 0.024 0.017 0.017 (0.007) (0.007) (0.017) (0.012) (0.011) 0.147*** 0.150*** 0.046** 0.068*** 0.072*** (0.044) (0.035) (0.016) (0.016) (0.016) 0.00 0.00 0.12 0.12 0.11 (0.10) (0.11) (0.18) (0.14) (0.14) -0.06 -0.06 0.17 0.10 0.10 (0.13) (0.13) (0.14) (0.20) (0.12) 8.83*** 8.93*** 3.32 4.65* 4.82* (2.17) (2.04) (3.42) (2.59) (2.57) 102 102 94 92 92 0.56 0.65 0.35 0.45 0.48 0.74 0.66 0.87 0.81 0.79 IV(6) 0.007 (0.010) 0.102*** (0.038) 0.03 (0.12) -0.02 (0.18) 7.96** (3.16) 64 0.45 0.80 IV(7) 0.006 (0.010) 0.112*** (0.035) 0.02 (0.12) -0.04 (0.17) 8.38*** (2.98) 64 0.50 0.76 IV(8) 0.096* (0.054) 0.039 (0.058) 0.97* (0.50) 0.31 (0.36) -10.82 (11.49) 59 0.60 0.69

Total trade share Net trade share Ln (population) Ln (area) Constant Number of Observations R2 RMSE

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

Table 4: The Impact of Export Share and Import Share on Per Capita Income, 1990
OLS 0.005*** (0.002) 0.029*** (0.009) 11.57 (0.000) 0.035*** (0.009) -0.023** (0.009) IV(1) 0.004 (0.007) 0.147*** (0.044) 19.37 (0.000) 0.151*** (0.037) -0.143*** (0.048) Coefficient estimates IV(2) IV(3) IV(4) 0.004 0.024 0.017 (0.007) (0.017) (0.012) 0.150*** 0.046** 0.068*** (0.035) (0.016) (0.016) 25.88 6.31 12.43 (0.000) (0.003) (0.000) 0.154*** 0.076*** 0.085*** (0.03) (0.021) (0.017) -0.146*** -0.022 -0.050** (0.040) (0.026) (0.022) IV(5) 0.017 (0.011) 0.072*** (0.016) 13.40 (0.000) 0.089*** (0.018) -0.055** (0.022) IV(6) 0.007 (0.010) 0.102*** (0.038) 13.19 (0.000) 0.109*** (0.030) -0.095** (0.046) IV(7) 0.006 (0.010) 0.112*** (0.035) 13.79 (0.000) 0.117*** (0.029) -0.106** (0.043) IV(8) 0.096* (0.054) 0.039 (0.058) 6.11 (0.009) 0.135*** (0.040) 0.056 (0.104)

Total trade share Net trade share F test Export share Import share

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

30

Table 5: The Impact of Export Share and Import Share on Per Capita Income, 1985
OLS 0.009*** (0.002) 0.024*** (0.006) 19.61 (0.000) 0.033*** (0.006) -0.016** (0.007) IV(1) 0.006 (0.019) 0.147*** (0.075) 14.32 (0.000) 0.153*** (0.058) -0.142 (0.092) Coefficient estimates IV(2) IV(3) IV(4) 0.004 0.035** 0.033** (0.014) (0.016) (0.015) 0.157*** 0.035* 0.044** (0.050) (0.019) (0.020) 15.06 6.73 10.44 (0.000) (0.002) (0.000) 0.161*** 0.070*** 0.076*** (0.040) (0.019) (0.017) -0.153** -0.001 -0.011 (0.062) (0.029) (0.030) IV(5) 0.032** (0.014) 0.050*** (0.019) 11.56 (0.000) 0.082*** (0.017) -0.018 (0.028) IV(6) 0.017* (0.010) 0.135*** (0.022) 26.57 (0.000) 0.152*** (0.021) -0.118*** (0.027) IV(7) 0.017* (0.009) 0.137*** (0.022) 26.55 (0.000) 0.154*** (0.021) -0.120** (0.027) IV(8) 0.069* (0.037) -0.010 (0.066) 8.09 (0.000) 0.059 (0.036) 0.079 (0.101)

Total trade share Net trade share F test Export share Import share

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. First stage bilateral trade regression instruments: ln (distance), ln (population), ln (product of area), common language dummy, common border dummy, and landlocked dummy. First stage net trade regression instruments: age dependency ratio, population growth rate, oil-exporting country dummy, urban population ratio, net income from abroad, changes in official reserves, relative price of tradeables, net current transfers (from abroad), and net workers remittances.

Table 6: The Impact of Export Share and Import Share on Per Capita Income, 1980
OLS 0.002*** (0.001) 0.028*** (0.006) 17.63 (0.000) 0.031*** (0.006) -0.026*** (0.007) IV(1) 0.013 (0.008) 0.076*** (0.020) 19.11 (0.000) 0.089*** (0.016) -0.063** (0.026) Coefficient estimates IV(2) IV(3) IV(4) 0.013 0.014** 0.017** (0.010) (0.001) (0.007) 0.077*** 0.046*** 0.039*** (0.028) (0.009) (0.009) 20.75 15.50 11.63 (0.000) (0.000) (0.000) 0.090*** 0.060*** 0.057*** (0.020) (0.011) (0.012) -0.064* -0.032*** -0.022* (0.037) (0.011) (0.012) IV(5) 0.016** (0.007) 0.043*** (0.009) 13.33 (0.000) 0.059*** (0.012) -0.026** (0.012) IV(6) 0.015* (0.009) 0.137*** (0.030) 12.26 (0.000) 0.152*** (0.021) -0.122*** (0.032) IV(7) 0.015* (0.009) 0.140*** (0.029) 13.26 (0.000) 0.155*** (0.030) -0.125*** (0.031) IV(8) 0.013 (0.010) 0.055*** (0.015) 23.42 (0.000) 0.069*** (0.010) -0.042** (0.023)

Total trade share Net trade share F test Export share Import share

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. First stage bilateral trade regression instruments: ln (distance), ln (population), ln (product of area), common language dummy, common border dummy, and landlocked dummy. First stage net trade regression instruments: age dependency ratio, population growth rate, oil-exporting country dummy, urban population ratio, net income from abroad, changes in official reserves, relative price of tradeables, net current transfers (from abroad), and net workers remittances.

31

Table 7: The Impact of Export Share and Import Share on Per Capita Income, 1975
OLS 0.007** (0.004) 0.027*** (0.007) 10.06 (0.000) 0.034*** (0.008) -0.020** (0.008) IV(1) 0.016* (0.009) 0.079* (0.043) 7.68 (0.001) 0.095** (0.038) -0.063 (0.048) IV(2) 0.014 (0.011) 0.094* (0.058) 6.81 (0.002) 0.108** (0.050) -0.080 (0.066) Coefficient estimates IV(3) IV(4) 0.023*** 0.025*** (0.007) (0.008) 0.039 0.025 (0.024) (0.021) 6.96 6.86 (0.002) (0.003) 0.062** 0.050** (0.025) (0.021) -0.016 -0.000 (0.026) (0.023) IV(5) 0.025*** (0.008) 0.026 (0.021) 6.92 (0.002) 0.051** (0.021) -0.001 (0.023) IV(6) 0.042 (0.030) 0.062 (0.135) 2.38 (0.113) 0.104 (0.118) -0.020 (0.155) IV(7) 0.042 (0.031) 0.059 (0.136) 2.32 (0.118) 0.102 (0.119) -0.017 (0.157) IV(8) 0.015* (0.007) 0.055*** (0.019) 7.40 (0.004) 0.070*** (0.019) -0.041* (0.022)

Total trade share Net trade share F test Export share Import share

Robust standard errors recorded in parentheses. The symbols *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. First stage bilateral trade regression instruments: ln (distance), ln (population), ln (product of area), common language dummy, common border dummy, and landlocked dummy. First stage net trade regression instruments: age dependency ratio, population growth rate, oil-exporting country dummy, urban population ratio, net income from abroad, changes in official reserves, relative price of tradeables, net current transfers (from abroad), and net workers remittances.

32

200 180 160

Total Trade (% of GDP)
BHS SGP

350 300 250 200

KIR MLT GUY ATG SWZ GNQ

BHS SGP

140 Export (% of GDP) 120 100 80 60 40 20 0 0 20 40 60 80 100 120 Import (% of GDP) 140 160 180 200
BHR MLT GUY ATG PAN SWZ LCA MYS BEL SYC SVK VCT IRL MNG BRB KWT SVN MUS GAB BWABLZ SLB JAM COG OMN NLDCZENAMMKDKNA EST GNQ AGOFJI BGRCYP GMB VUT IRQSAUPNGLTU GRD DMA LBR HRV LBY CHE TTO TKM MDA DJI YEM JOR NOR MRT CIVLVA TGO CRI NGA HUN ZMB AUT UKR ISL TUN DNKVNM KORSEN SWEHNDISR STP WSM FIN TJK CANTHA PHL ERI BTN TON ZAFPRY LKA DEU IDN DOM CHL VENNZLPRT NIC GBR ZWE ECU KEN BLR ROM DZA KAZ KHM CMR SLV FRA SYRMWI POL EGY RUS BOL BEN URY GIN ITA MAR ZAR KGZ MEX NERAZE ESP CAF IRN GHA CPVSOM GTM CHNMDG MLI COM UZB AFG AUS SLE PER TCD GRC GEO TURHTI TZA COLPAK LAOARM LBN JPN NPL ALB ARG ETH BFA GNB BDI BRA SDNRWA MOZ USA UGA IND BGD MDV SUR HKGABW

MDV SUR ABW

HKG BHR

150 100 50 0

LSO

ERI LBN

KIR

LSO

PAN LCA KNAVCT SYC SLB MYS SVK BEL MKD MNG NAMBLZ IRL BRB MUS DMA GMB EST SVN JAM COG CZE BWA JOR DJIGRD CYP FJI NLD VUT WSM YEM MDA LTU BGR GAB AGO KWT HRV OMN PNG STP MRTTGO TKM TON SAU LBR LVACHELBY CRI BTN ISR TUNHUN TTO IRQ SOM VNM CIV NIC HNDZMBNGA AUT SEN UKRNOR CPV LKA THAISL DNK MWI TJKKOR KHM DOM FIN BENSLVKENSWE COM AZEPRTPHL CAN PRYDEU NZL KAZ EGY SYRCHL ZWE MAR ROM ZAF GNB ARM MLI KGZ GIN IDN BLR TZA CAF BOL ECU GHA GBR NER POL DZA ALB GEO AFG CMR FRA MOZ LAO SLE ESP VEN BFA TCD MDG ZAR RUS GTMITA GRC URY IRN RWAHTI TUR NPL MEX BDI ETH UZB PAK PER CHN UGA AUS SDN COL JPN ARG BGDUSA BRA IND

-120 -110 -100 -90

-80

-70 -60 -50 -40 -30 Net Trade (% of GDP)

-20

-10

10

20

Figure 1: Export Share vs. Import Share, Mean 1970 1998

Figure 2: Total Trade Share vs. Net Trade Share, Mean 1970 1998

(Fig 3-1)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH OG NU O POC UACSAU AG DZARE DA ARFRZLLT BEL BH RH KG G LE CZAFLO ONU CPNANH E S HHKW DRL R MR IDAU BRSASYNBLZATG JAUNMRTBPAN NRPN SW PEREUBH A ZWNBR ITAN IRL CZA K VNN SLE KO UMEXIVNLD IRCISL FIN INESPINDGMYS BOTHC GTMBW BR TUHCM FJ GKEN BG PH ETHBTNT MW SEN HDGCR MU TIM ALB SDBENYGAM I S Z PAK RD BGMARITSYC A RNNHC LRINLCT WOISR LKA REGAR YP GNPRJ VC UGDAFMAO SW GDYEM A TU MDOZMB MLT LAOTG MB TCERN AM CPLG Y ABW SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M NDJ O R STP KN MOW NIC A Z Q TON G SM SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0844 0.5134

T
1.0000 0.2866

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D NN LD K SLVJIRL KIR TG COISR AM OUBH GDTMR BLZ R C O GREUGI J O HKW T S PR N CM N RDLKANMB GBG T BR D BGFINORNMYS HITAAE Q TI NFRITU IC PAN PLM SEN ESPEN PO SW GDBTN N UKOB PAKU PH RCBENYLSLB WSYR A ZWHR EC L MAR TUHOMRFJ I BDOG SLEM GONAAB MW EG JCHRMR INBOENI A LAOY DGM KTH NRSAU UMDISL OG GZA MN VEN A PERYEM VN MR DZAR TZA ARMOPNA CPNAN BFA GL ETHGG IRCZL IDLC SDSASINOG NCG SO NZMB CAF MLI CAPR UMEXIV BRZAFZ YT AUAG NND TCER KN A BR B BH R BEL MU S CH SYC E CAULD YP TTTO N D SLVDIR LK J AMN TGOCEU BH ISR RH MB PRRKWS CFR J NC ORBGTIU N OIC MHBLZ T R GGTM ITA PAN OMD GBR LKAPO TUNMO BGMYS FJR KO N BEN A U PLISL SEN G N QBDRPHDIIR SYR DWA E O ESP FIN BTNNRR O G N LAOTIECL PAK SU ZW MARO SLBBGHSWMLR MN TUN IMWZL SLE H PN THYLIV EGYUH Y GIN KEN N IND GAAN VN PRPER MDDIDT AO MEX GC TZASDJAHZAAB BFANAR G CG ETHL IRSA ZMBCSAU R MRDS MO ZYEMZARNG N G A SO MUAFCZAFVEN MLIBOMR CNPNAG G UN BR AU TC ERNO MLT H KG SG P

KIR SU R

20

Q AT KW T BH R VEN R NSAU O MEX DIDO MN IRZA NN H KG DN G A EU CDHN BEL GR N LBN JAUANE LD MLT NISL CS UKO RK SW UPNBRH ESPYBH ARFRZLLT S GISR ITAA BRSAAURE AC GFIN AB RC U CDBG N PO TUHL M YP PERGLC NMYS TTO RORTU OM O BR B ECLLYIMU J ZAFYTAM O R CBOCUJOGPAN HPRRIRL I S NC FJ PH MAR ALB PR EGN H IV INCSLVGT A LKA CDSYRAIC MRZMB C PV AF PAKENBLZ GNCGBWQ HG SOTHO GSEND TM MD MR MB ZWM SDBENMNLSO Z MD V VNA HSLE N O AG ZAR CTI PN OM GDYEM NB LAOTG AM MOW Z BGTZA IVU T MLI ETHBTNG SW KEN NNGD SM MW PL IN U TCER SLB GA BFA BD R W AI KW BH RT SAU R N O VEN MEX SG O IRDNKG MN N P ID ZA H BEL DS AU R N G A MLTJNEUK CISL D LD AN GBREG ISRZLS KO H Y NBH PN C U SW R UITAA SA ESPNL AR FR AU CCUT H FIN GOMRAG AB RBR E CSU TURO L PER RBGTPOLR D OPAN CHM N YP TUMYSTTO NI PRRS L J O R PRAMB U MUYLL N EC CBR BOI O G CC PH IR MAR ALB EGY ZAF FJ H N IC CGJIND SLVC D THN MB HBLZ LKA C PV GMR MR SEN AFA PAK H SO ZMBZW ASYR GTM G N Q M MHVNTMD V MDBW AMG SLE SDC TGOAIV GIN CZ BSWTI GTZATBEN W SMONMWGEO MONN BTNNIM LAOD BG Z SLBYEMZAR MLIER ETH TCGA D KEN VU NPNAG U WA BFA BDR PL I AR E KW T BH R VEN SAU O R N MEX IR Q O MN D ZA IRN IDN N SA D BEL AUGKOYBHN LD ISL C SA G BREU AN B RISR NH L D N ZL J PN UC U RITAJ IS K TC H E ESP ARSW EAZE GFR BRTUBGRN AU FIN NPOLC CACHD OOLU GABLO MC PERR NG RG SU MYSR TTO DRYU ZAFTUOR MNECYLMRIIRC YP MU SBR B BOG PANT C EGFJ IJ AM L H L JPR N C PHU MAR PRG BLZ Y CG U YIC O SYR N TH MRPAK MB IND CGM A MR MMR CVNTLKA SLV AFSEN CG G SOBEN N D LBR MDH H ZMB G SDZWA TG M PNSLEB G H AGOBGQ O ZARIVNTITM GG TZA E MON C LAO YEM SLB MLIIN I TCGBTND M KEN NETHNPLO ERZ MW UDN G BFA AIA BD RW

SG P SU R LSO LBN

SG P H KG

MLT

predicted_net_trade

T E T E

1.0000 0.1344 0.5277 0.1683

1.0000

-20 0 200 400 600 0 100 200 300

(Fig 3-2)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH OG NU O AG UACSAU POC ARFRZLLT BEL BH RH KG DZARE G LE DA CZAFLO ONU CPNANH E S HHKW DRL R MR BRSASYNBLZATG IDAU JAUNMRTBPAN CZA BR ITAN K NRPN SW PEREUBH A VNN SLE IRL KO UMEXIVDLD IRCISLN FIN BOTH INZWCM GMYS GTMBW BR GKEN TUHNR FJ ESPINY BG ETHBTNT MW PH ALB HDGCR MU TIM SEN SDBENYGAM I S Z BGMARITSYC A RD PAK LKA RNNHC LRINLCT WOISR GNPR C VC REGA J YP UGDAFMAO SW GDYEM A TU MDOZMB MLT LAOTG MB TCERN AM CPLG ABW SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M NDJ O R STP KN MOW NIC A Z Q TON G SM SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0844 0.5579

T
1.0000 0.3060

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S KIR SU R KN A BR B BH R BEL MU S CH SYC E CAULD YP TTTO N D SLVDIR LK TGOCEU J AMN BH ISR RH MB PRRKWS CFR J NC ORBGTIU N OIC MHBLZ T R GGTM PAN ITA OMD GBR TUNMO LKAPO BGMYS FJR SEN N BEN A R PLISL KO DWA E O G N QBDRPHDIIR SYR ESP FIN BTNNRR O SW G N LAOTIEC Y PAK M ZW SLBBGHVNSUL MN TUN MARO IMWZL SLE H PN THYLIV EGYUH LU GIN KEN N IND GAAN PRPER TZASDJAHZAAB MDDIDT AO MEX GC BFANAR G CG ETHL ZMBCSAU R IRSA MRDS SO MUAFCZAFVEN MO ZYEMZARNG N G A MLIBOMR CNPNAG G UN BR AU TC ERNO MLT H KG SG P

C H SYC E C AU T TTO YP D NN LD K SLVJIRL KIR TG COISR AM OUBH GDTMR BLZ R C O PR N GREUGI J O HKW T S CM N RDLKANMB GBG T BR D BGFINORNMYS SEN NFRITU IC PAN HITAAE Q PLM TI ESPEN PO SW UKOB GDBTN N RCBENYLSLB WSYR PH A PAKU ZWHR EC L TUHOMRFJ I MAR BDOG SLEM GONAAB MW EG JCHRMR NRSAU INBOENI A LAOY DGM KTH UMDISL OG GZA MN VEN A PERYEM VN MR DZAR TZA ARMOPNA CPNAN BFA GL ETHGG IRCZL IDLC SDSASINOG NCG SO NZMB CAF MLI CAPR UMEXIV BRZAFZ YT AUAG TCER NND

40
Q AT

20 0 -20

BH R KW NO T ID N R VEN SAU MEX D ZAG A N MN O IR N R KO H KG JGD ANHT BEL CDC A ITAN AU EUKE CPNNUNAMU S HPR T RISL C UESPURLD MLT SAS C NBR N FRZLBH S RFINLL B OISR M CTH SW POA ALB BRMB TUHLYE YP LKA BRGRHMIRLPAN C CECTU G OO ARZAFYGINMYS GTTO INUARPN AM I DBGR PERGUJLBN MAR PH VNE MD MABFJ BO G Y SO LMN PAKIN SLV ZWDL SDNHMRBLZ R MD V N EGA N LSO LAOTG AM GC PV NZ ETHBTN ICT CPLIN SM AF GNPR O SW SEN MR BGZARIDOA BDYEM D B MW GM AG TCER VU GKEN SLB TM C UHSLEBWQ A IV MOC MLI CTI W O RCTZA N T J O Z WSYROG BFAG BENZMB

SG P SU R LSO LBN

BH RT KW NO ID N R SAU MEX VEN D ZA MN SG O IR N P N G A KOHE JC LD PN D CN R H AN AUEU GOMHAL RAUSKG FIN D BEL UITA SA MLTCRHN NBH ESP T FR RBGTPOS THHZL L A PRBRBN MUYPN K ISL C GBR CMYS BR ALBU TUS LKAME Y ISRII CSW A DFJZAF OR C TURUO L GJINDRG MB MAR PNPAN PHNR EGYARL R PRPERG AB MDVNSUTTO BOI SLVGL U PAKG AMY EC SD W PLAG WN QZYEMAMMO V SMMUSENTMD SLBBGMRC A LAOTI GPVTGONIV NMLIHC L SLE CNGA SWC GJSOBDMHZW OSYR BG Z IMW VURETH OTZATBEN GIN C ICN BTNAD ZAR NC ONAFN I E TCGTM ER D MORZMBBDMRG WA BFABLZ KEN

AR E BH R N KW T IDN O R VEN SAU MEX DIRA ZA NO MN GQ IRN R KO J PN D C AN ITAGNAU AU S RG REU LDTC H E CSACAOAZE HZL U T N FIN BEL UCTHBYUMCN KYP MU SBR B NU GPR N ESP FR NPO BR ISLEBH C SWLC D S H LKA L BRTULHMR IIRC GATU ISR UR CDR Y O ARUMYS TTO G ZAFMU N MMR INDBG GABYCIMB SU G R PNPHPANAM L PERL MAR G EG O VN N G PRTFJ N Y MDLNPL BOGRHD D MNECYLQ J IO SOSLEBJ SLV MNI TG PAK DR ZW SDDH IC BTN GSYR CTZA JTI MRG BLZ CGN MR CLAO E OG BD MW H ZARIVAG AGOBG TCAFSENTM NETHNAOO M ERZ CSLB YEM UBEN MOG C MLIIN A RW LBR BFA ZMB KEN

SG P H KG

predicted_net_trade
MLT

T E T E

1.0000 0.1344 0.5277 0.2180

1.0000

200

400

600

100

200

300

33

(Fig 3-3)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH R NO PON UACSAU S AG ARZAFIVNLD ATG RH KG G A DIDAUO L DU CFRKW G ONU CPNANE EBPAN HHLC O MR DRLL BRSASYNTYP BH ZAR JAUNMR TBEL PEREUL FJ NRPN ZWCRK VN CZA BH ITAN IR SLE UMEXM GMYS KO IRCISL A FIN INPAKEHBLZ BO NBW DTM GGC BR TUHZLDMU GSWBR ESPINY BG PH KEN ETHTHG O SEN ALB TIM SDBENYITAM I T Z BGMARCSYC A GEGTU MB RBTN RNNHC LRINLCS WOISR LKA RNPRR VC GMW J A UHDAFMAT SW GDYEM AD MDOZMB MLT TCERN ABW LAOTG AM CPLG SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 -0.1185 0.9028

T
1.0000 -0.0775

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D TGLD NN K SLVJIR L KIR COISR AM OUBH GDTMR BLZ C O PR N GREUGT J OR HKW S CM N RDLKA IMB GBG T BR D BGFINORNMYS NFRM N QPAN HITATU KO SEN TI ESPU POA SW UPLIAMN GDLG N ZWHR PH RCBENYN FJ I WSYR A TUHOMRIC EC L MAR BDOB SLEM GMWAB ON JCHRMR PNBTN EGC LAOEI A NRSAU K INPAKYESLB DGN UMDISL O GZA VEN VN PERTHL MR TZA DZAR ARSASINOG BFA GAN CSOYEM ETHEN IRCGG BOZL ID L SDMOPNA G NCG CAM MLI UMEXIV AG CAPR AUNDZMB BRZAFZ Y T TCER NAF KN A BR B BH R BEL MU S SYC E CH CAU TTTO YP N L IR D SLVAMLD TGRD EUK JOC N BH ISR MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ PAN O TM GITA TUNME N LKAPO BGMYS D FJR N BENR U SEN PLISL KO DWM ON G N QBDRPHBROSYR ESP FIN BTNAEC G N LAOTIRR L ZW PAK SU TUU SLBBGHSWMLR MN MARIV IMWZL THYAIO HYPN EGMEX Y KENL GCL IN GSLE AN VN PRPER TZASDJNHZAAB MDINDH O GZAF ZMBIRSA G BFACSAU ETHT A MRCN MO ZYEMNARNG N G A SO MUAFCDSGR MLIERGO VEN U AN CNPNAG O AU ZAR TC BOMR DID BR MLT H KG SG P

KIR SU R

50 0 -50 -100 0
BH R C IV CSLEAB G ONC O G L C GA ECSAU NTTO VEN SW IDISL ARZAFLLTMUATG CGSYRIR MYS FINO POA GAN MR R N CHH BRFRZLCAM I AA PERTHDGL DZARE LC ITAN ABR CPNERH SYC ESPUJ BO N K HHL INUPLPNRB DD U SDSASYNAFJPAN UMEXGRYP NRN UAUACZMBMA JNNZALYIND KO KN PH IRDAU GSEN TM NG ETHENNLD TUHC R D BGMARITBLZ S PAK BEN LKA MDO M T GMWR O PR A GTZABRKN MLT HEGTU E TIMR RC TG CSLV AF MLI TCISR MB BFAY G NIBG BD D N IC OR SLB VUJ T C PV W SM SG P BH R CO C IV G O SAU SLE G AB G A ZAR L N C ND MYS SW LCCBRZA AU FIN APO ISL IR FJU NSYCHLL THATGLR ERSG ITA A GCN ETTO JUID R U MEX HZAF ESP BOEC AU SDCDS Y SENZL P N D MAUMARILOSYR MUAANG GPER VEN KOMR DGBLZAK KEN N CINAR PHDI N DRBRLD PNPAN CAM YP TM PLS HFR KNGZMBIRSAN ARNAFNMB ETH MWDA TUJNIUT TU H PRBRR LKAPN PAK T BEN MDCTGE GMRLD PRR N A HO TGHYH CBGTIR MLTG SLV C EGO TC BFA GTZA ISR NMLID B BD Y J SLB G MB OR I N IC T VU C PV W SM BH R CC O L OIV GGG NNAB U SAU E ZARGFJ I DIR L C NMYS HA VEN ID SD ITA AUTHFRU AMLD ARUSEN CHPN L PO FIN ISL CD SLECJ N C AN G ZAFSYR NETHRPLRNTTOTC MU SBR B KN ASG P BRECLGN I AU SYC PER MEX HR CERESPTM BOANAY L N INZL UIRMRHRAD N KYP H E SDZAPAN SABG N UTUO J SW KENA PH PNBENBR C DH NY MW TU PRKOBLZ MAR ZMBAL R MRGLKA TO PAK MDTOIM GG PR G CTZAYGD SLV MLIH R TG EG TI TCAF NG MB D BFA IBISR G BD IC J SLBO R N MLT

predicted_net_trade

T E T E

1.0000 -0.1820 0.7105 -0.1445

1.0000

KIR

KIR

KIR

200

400

600

100

200

300

(Fig 3-4)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH R N PON UACSAU S AG DIDAUO L DO ARZAFIVNLD ATG RH KG G U CFRKW G ONA CPNANE EBPAN HHLC O DRLL MR BRSASYNTYP BH JAUNMR TBEL ZAR PEREUL FJ NRPN ITAU IR ZWCRK VNN CZA BH SLE KO UMEXM GMYS IRCISL A FIN INPAKEHBLZ DTM BO NBW GGC BR TUHZLDMU GSWBR ESPIN BG KEN PH ETHTHG O SEN TIM ALB SDBENYITAM I T Z GEGTU MB RBTN BGMARCSYC A LKA RNNHC LRINLCS WOISR RNPRR VC GMW J A UHDAFMAT SW GDYEM AD MDOZMB MLT LAOTG AM TCERN ABW CPLG Y SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0111 0.8242

T
1.0000 0.0246

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D TGLD NN K SLVJIR L KIR GDTMR BLZ COISR AM ONBH S C O GREUGT J OR PR D U HKW CM RDLKA IMB GBG T BR N BGFINORNMYS NFRM N QPAN HITATU KO SEN TI ESPU POA SW UPLIAMN GDLG N ZWHR RCBENYN FJ I WSYR PH A MAR TUHOMRIC EC L BDOB SLEM GMWAB JCHRMR PNBTN ON EGC LAOEI A INPAKYESLB DGM NRSAU K UMDISL O GZA VEN VN PERTHL MR TZA DZAR ARSASINOG BFA GAN IRCGG CSOYEM ETHEN ID L BOZL SDMOPNA G NCG MLI CAN UMEXIV AG CAPR AUNDZMB NAF BRZAFZ Y T TCER KN A BR B BH R BEL MU S SYC E CH CAU TTTO YP N L IR D SLVAMLD TGRD EUK JOC N ISR BH MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ PAN O TM GITA LKAPO TUNME N BGMYS D FJR N BENR R SEN PLISL KO G N QBDRPHBROSYR DWM ON ESP FIN BTNAEC O SW G N LAOTIRR Y ZW PAK O MARIV TUU M SLBBGHVNSUL MN IMWZL THYAIH HAL EGMEX U KENL GCC IN PN IN GSLE PRPER MDDYAN O GZAF TZASDJNHZAAB ZMBIRSA LVEN BFACSAU N ETHT A MRDN MO ZYEMNARNG N G A SO MUAFCDSGR MLIERGO UID CNPNAG G AU ZAR TC BOMR BR BH R SAU G N CO C IVG AB G A NN IDO LR SLE CZL MEX LVEN ND ETTO SWS FINN AUECL ZAR PO ISL IR ITA CBRZA GCDHLK FJULDU FR A NMR HAN MYS ZAF SG ESPRG BR THJAIUA Y AU IRARN N PER KOHT P JU SAN AM D C PN MUTMESYR BO NPNPAN BR SDRSR CIN L C H PHN DERIL O USENGB G YP NKEND PLC TU PR YM PR T LKA BGA GH NR TU D HN R ETH MW MAR MD G I GMR ZMBOAT BEN MLTBLZ C PAK AF TGHTI MLID TZA ISR EG TC Y SLV G N BFA B BDG MB I N IC VU J SLB T OR C PV W SM MLT H KG SG P

KIR SU R

20 0 -20 -40 0

BH R CSAU C IDGO O G ONC R LG N IV A NAB VEN SLE DZAR K CA MEX L NTTO DU FIN SW ECH AUANE PON UABR ITAU R CZA ARSASYNAFJ I GISL FRZL MR BRZAFLNLD JCGSYRIR LPAN CPNERJ MU HNL AU UIRHC H EMYS PERTH B KO INESP R TYP D N BR BOC M SDNTMR AM S PH O GSEN UGDACLYIN KEN N NPR C PLTU TUH PN G R LKA BGMARITBLZ D RN ETH MR T PAK ZMB MD G HMW DO MLT GTI A H TG BEN CMLI AF ISR TZA EG Y TC D SLV BFA GN B BD I G MB SLB N ICTOR VUJ C PV W SM

BH R SAU NOOO GG CCABL R IV NA GN IDSLE VEN CU R E H NS G ZL MEX Y TTO K SW FIN AUECLH UDN LD ZARGFRIANNL PO ISL CD MRITA AU ANMYS ARZA U ZAFSYR CHPN L BRTHFJR IR TC H E JA CPERABR N UERESPJ SAD INKO BON OC R I L NIRPHPANAMC YP MU SBR B SD G AG TM N SEN PN DLKA T UTU G G KEN LM PR N PL YI BG TU ETH R R MW PR MRPAK D D MAR MDT H N C H G H BLZ ZMB TI BEN C AFGA TG O MLI Y ISR TZA TCEGN B SLV D BFA G BD G MB I SLBO R N IC J

SG P

SG P MLT

predicted_net_trade

T E T E

1.0000 0.0114 0.7075 0.0257

1.0000

200

400

600

100

200

300

(Fig 3-5)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH R N PON UACSAU S AG DIDAUO L DO ARZAFIVNLD ATG RH KG G U CFRKW G ONA CPNANE EBPAN HHLC O DRLL MR BRSASYNTYP BH JAUNMR TBEL ZAR PEREUL FJ NRPN ITAU IR ZWCRK VNN CZA BH SLE KO UMEXM GMYS IRCISL A FIN INPAKEHBLZ DTM BO NBW GGC BR TUHZLDMU GSWBR ESPIN BG PH KEN ETHTHG O SEN TIM ALB SDBENYITAM I S Z BGMARCSYC A GEGTU MB RBTN RNNHC LRINLCT WOISR LKA RNPRR VC GMW J A UHDAFMAT SW GDYEM AD MDOZMB MLT LAOTG AM TCERN ABW CPLG Y SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0111 0.8295

T
1.0000 0.0376

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D TGLD NN K SLVJIR L KIR COISR AM ONBH S GDTMR BLZ C O GREUGT J OR PR D U CM HKW RDLKA IMB GBG T BR N BGFINORNMYS KO HITATU TI NFRM N QPAN SEN ESPU POA SW UPLIAMN GDLG N ZWHR RCBENYN FJ I WSYR PH A MAR TUHOMRIC EC L BDOB SLEM GMWAB JCHRMR PNBTN ON EGC LAOEI A K INPAKYESLB DGM NRSAU UMDISL O GZA VEN VN PERTHL MR DZAR TZA BFA ARSASINOG GAN CSOYEM IRCGG ETHEN BOZL ID L SDMOPNA G NCG CAN MLI CAPR AG UMEXIV BRZAFZ Y T AUNDZMB NAF TCER KN A BR B BH R BEL MU S CH SYC E CAU TTTO YP N L IR D SLVAMLD JOC N TGRD EUK BH ISR MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ PAN O TM GITA LKAPO TUNME N BGMYS D FJR KO N BENR R SEN PLISL DWM ON G N QBDRPHBROSYR ESP FIN BTNAEC O SW G N LAOTIRR Y ZW PAK O MARIV TUU M SLBBGHVNSUL MN IMWZL THYAIH HAL EGMEX U KENL IN PN GCC IN GSLE PRPER MDDYAN O GZAF TZASDJNHZAAB BFACSAU ZMBIRSA LVEN N ETHT A MRDN MO ZYEMNARNG N G A SO MUAFCDSGR MLIERGO CNPNAG G UID AU BR ZAR TC BOMR BH R SAU C OR C IVG AB G A O LVEN N OGN CZL TTO SWLD SLE NDH MEX L ID R ISL UE D AR GBRSLK AUEC Y FINNG IR PO ZAR CBRZA FRN SG ITA ESPA L FJSANU HPN CAN PER ZAF JN A MYS IRPANP N AU KOMR JUAIUTSYR BO C THRSR NGAM E MUALL N PHNH G TM CIN M SDCH DERI O CN TUD KEN PRBR USENGB TU YP HD NMWR PN PLC BGY PR T GH N D R ETH MAR MLTBLZ PAK ZMBOAT GMR BEN ISR MD G CLKA I AF TGHTI MLI Y EG SLV TZA D TC G N BFA B BD N IC I J SLB G MB OR T VU C PV W SM MLT H KG SG P

KIR SU R

20 0 -20 -40 0

BH R SAU C IV C ONC O G L AB GG NOA VEN R TTO C SLE N N MEX N IDISL USW R DZAR K ZA ARFRZLL LD GBR GDN AUANE ECH FIN POY ITAA BRSASUNFJ I A ESP R MR UIRHLL IR LPAN PERAU ZAF JCCSYRT MYS PN UJ N KO CBOTH EB H ERH N C INGSEN AM DR M PH BR C SDNTMRAYP S TUH PN MU KEN PR UGNPR CIN GDO LD AN N MW Y T PLTU BGMARITBLZ MLT ETHISR G LKA PAK ZMB H TIMR O GR C BEN MD G CH A AF TG MLI EG Y SLV TZA TC D BFA GN B BD I N IC OR G MB SLB VUJ T C PV W SM

BH R SAU CCABL R NOOO IV GGG NA VEN TTO CN H K NSW ZL MEX E IDSLEBR ISL D SGL ARU R Y AUECLH UDN LD FIN PO ZARGFRIANNL CIRZA U AN FJ BRMRITA IR T ESP C AMYS U PERPAN AU ZAFSYR SA R J PN BON L R CERNOCTM HD CHE TH INKO D SEN N PRL AG J AMC YP MU SBR B SDPHAM I N KENG Y UTU R R TU PN PAK D T G I N BG MRGLKA D ETH H N C MAR ZMB PL MW PR G H BLZ H BEN MDT TIISR C AFGA TG O MLI Y TZA TCEGN B SLV D BFA G BD G R NI JIC SLBOMB

SG P

SG P MLT

predicted_net_trade

T E T E

1.0000 0.0114 0.7075 0.0407

1.0000

200

400

600

100

200

300

34

(Fig 3-6)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH O NO UACSAU S AG PON DIDAUO L DU ARZAFIVNLD ATG RH KG G A CFRKW G ONU CPNANE EBPAN HHLCBH DRLL R MR BRSASYNTYP BH ZAR JAUNMR TBEL ZWCRK CZA BW VN ITAN IR SW PEREUL FJ NRPN SLE UMEXM GMYS KO IRCISL A FIN BO NBR GGC BR INPAKEHBLZ DTM TUHZLDMU GSEN ESPIN BG ETHTHG O KEN PH ALB TIM SDBENYITAM I T Z BGMARCSYC A GEGTU MB RBTN RNNHC LRINLCS WOISR LKA GMW J A RNPRR VC UHDAFMAT SW GDYEM AD MDOZMB MLT LAOTG AM TCERN ABW CPLG Y SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0959 0.7534

T
1.0000 0.1697

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D TGLD NN K SLVJIR L KIR COISR AM ONBH S GDTMR BLZ C O PR D U GREUGT J OR CM HKW RDLKA IMB GBG T BR N BGFINORNMYS NFRM N QPAN KO L SEN HITATU TI ESPUI POA BTN SW UPLIAMN GDTH N PHG RCBENYN FJ I WSYRA ZWHR A MAR TUHOIVRIC EC IN BDOB SLEM GMWAB JCHRMR G PNISLY T ORPN LG EGC LAOELA G KNSAU EN INPAKYESLB DGNMO NPR ZL UMDYEM GZA VEN PER M VN MR DZAR TZA BFA ARSAS ZMB CSOG IRC G G ETH D BO ID SDMO ZO NAN CA MLI CAC UMEX AG BRZAF NAF AUNL TCER KN A BR B BH R BEL MU S CH SYC E CAU TTTO YP N L IR D SLVAMLD JOC N TGRD EUK BH ISR MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ O TM GITA LKAPO TUNME N BGMYS D FJR N BENR Y SEN PLPAN KO DWMI O ON G N QBDRPHBROSYR ESP FIN BTNAEC U G N LAOTIRR L PAKZL ZW MARIV SLBBGHSWMLR MN TUUO IMWD VEN SLE THJISL GR HYL C EGIRARNG N G A KENTZAAB INDLO NCN GYAH G IN GGN VN PRZAR MDDAPN TZASDCAN BFACSAU ZMBMEX ETH S MRZAF MO ZYEMPER O SO MUAFIDSU MLIERG A CNPNSA UNMR AG BR AU TC BOH MLT H KG SG P

KIR SU R

20 0 -20 -40 0 200 400 600 0 100 200 300

ID N N VEN C O LO R CZL MEX L NS CZA AUANE MYS DH DFINRKG SW ITAN KO AU TH ISL CESPYNA HN EC UANU NLD J PNBRHTMU FR PN ZAF BRSACUJIR LPAN GR A UIRHC R AM S C NPR DE MR HN INBO MRIFJ SDDLKA T I SEN GPH RL KEN TU ACLT ETH G NDR PL UMDO M G PAK BGSLVN IC GD TM TC D SLB GN B VU T C PV W SM SG P ID N P SG N O VEN C O LR CZL MEX K ND CD N AN AU H L FIN E MYS SWS N KOHZA AU THJAEC U PNPAN G ISL MUITAT Y U JIRSAN AMLD ESPA N FRRL ZAF BR N IR GCH R HPN U CS A CUBRE BO IN FJ I PRRD LKA MR SDNIL SEN GH CLD RN C PHT MR TU ETH NKENT PL UPAKR G N IC SLV A D D MDO BGTM SLBTCGGM D GN B VU T C PV W SM ID N VENL R CN O O CHL MEX N ZL CD SMYS AN AU ZA E D N K FIN SW KO PNU G Y A IRLD G ISL CSA RITA NAU H E HN UR N EC J A ABR PN C ESP ZAF PAN I BRTHFRU AM L TC MU S UIRMRH J N C L GR BONFJ IR C INT PR D SDPHH N D SEN MRGLKA T KEN L ETHNRM UTUAIC PAK DO MD N PL SLV G BG SLB D TC D G TM GN B SG P

predicted_net_trade

T E T E

1.0000 0.0752 0.7719 0.2711

1.0000

(Fig 3-7)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH O NO PON UACSAU S AG ARZAFIVNLD ATG RH KG G A DIDAUO L DU CFRKW G ONU CPNANE EBPAN HHLCBH MR DRLL R BRSASYNTYP BH ZAR JAUNMR TBEL SW PEREUL FJ ZWCRK NRPN VN CZA BW ITAN IR SLE UMEXM GMYS KO IRCISL A FIN BO NBR INPAKEHBLZ GGC DTM BR TUHZLDMU GSEN ESPINY BG PH KEN ETHTHG O ALB TIM SDBENYITAM I S Z BGMARCSYC A GEGTU MB RBTN RNNHC LRINLCT WOISR LKA RNPRR VC GMW J A UHDAFMAT SW GDYEM AD MDOZMB MLT TCERN ABW LAOTG AM CPLG SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 0.0959 0.7712

T
1.0000 0.1787

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S C H SYC E C AU T TTO YP D TGLD NN K SLVJIR L KIR GDTMR BLZ COISR AM ONBH S C O PR D U GREUGI J OR HKW T CM RDLKANMB GBG T BR N BGFINORNMYS SEN NFRMESLB KOG HITATU QPAN TI ESPEI POA SWL BTN UPLIAMN R GDOU N ZWHR RCBENYN FJ I WSYRA PAKYL PHB AM TUHOIVRIC R MAR EC IN BDISLY SLEM TH A GMWAB JCHGMR PN L O EG LAO K INBOEN DCG N UMDYEM GZA VEN VN PERZL MR TZA DZAR BFA ARSASCOT IRC N GAN CSOGZMB ETHL ID SAU SDMOPN G NN MLI CAM UMEXG AG CAPR TCER AUND NAF BRZAFZ O G KN A BR B BH R BEL MU S SYC E CH CAU TTTO YP N L IR D SLVAMLD TGRD EUK JOC N ISR BH MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ O TM GITA TUNME N LKAPO BGMYS D FJR SEN N BENR Y PLPAN KO G N QBDRPHBROSYR DWMI O ON ESP FIN BTNAEC U G N LAOTIRR L ZW PAKZL TUUH SLBBGHSWMLR MN MARIV IMWD VEN SLE THJISL GR N G A HYAO AB EGMEX KENSU IN PN GID IN GGL N AN VN PRPER TZASDCDLO MDDYAN ZMBIRSA G BFACSAU ETHT MRCS MO ZYEMNARNG SO MUAFCZAF MLIERGZA UNMR CNPNAG ZAR TC BOHAO AU BR MLT H KG SG P

KIR SU R

20 0 -20 -40 0 200 400 600 0 100 200 300

VEN N C IDLO R ON CZL NS MEX L AUANE LD CZA N DH N SW DFINRK UAISL KO GR U BRSAAU T MYS ITA EC J PNBRJIR LPAN ESPY FR A UIR NPN AM S ZAF RAMU C U L CH NNH IE MR N C CBOTHDG SEN TUHMR IC R GPH LT RC SDDLKA T I IN NPR N FJ KEN U G TM GO ETH M SLV NDA PAK BGPLG SLB D MD TC D GN B VU T C PV W SM SG P SG P N O VEN IDO LR CN CZL ND E MEX K AU H L CISL AN SWS D U FINN MYS KO R GJNEC Y BR BR ZA IRPAN N AULD ESPR PN FR A JUITAT U AM A PNSA MUAIUE HIR THRSD N BO L CC H L H CZAF NG SENIT N FJ MR PHCH MR PR TD R SD NR KEN IN N IC GTUL LKA UPAK G DO SLV AM NETH PL BG D MD TM SLBTCGG D GN B VU T C PV W SM VEN ID N L R CH L O CS O NSW ZL MEX AU ZA E DN LD CD UMYS N K AN R Y ISL FIN KO BREC PANAM T J N BR PN ESP UIR A GITA N AU C MU S SA UR ZAF FR A PNMR CJ HE BO L A R CTH L C HGFJ U IIR L N SEN TU PR MRNNH N D SDPHR IRT KENG C INT IC D U G AG TM ETHLKA DO PAKM BG MD N PL SLV G SLB D TC D GN B SG P

predicted_net_trade

T E T E

1.0000 0.0752 0.7719 0.2753

1.0000

(Fig 3-8)

total_trade

50 0 -50
LBN N GA O MN VEN SYR TTO G AB MD V ECH O NO PON AG UACSAU S ARZAFIVNLD ATG RH KG DIDAUO L G A DU CFRKW G ONU CPNANE EBPAN HHLCBH DRLL R MR BRSASYNTYP BH JAUNMR TBEL ZAR PEREUL FJ ITAN IR NRPN SW CZA BW ZWCRK VN SLE KO UMEXM GMYS IRCISL A FIN INPAKEHBLZ DTM BO NBR GGC BR GSEN TUHZLDMU ESPINY BG KEN PH ETHTHG O TIM ALB SDBENYITAM I S Z BGMARCSYC A GEGTU MB RBTN RNNHC LRINLCT WOISR LKA RNPRR VC MLT GMW J A UHDAFMAT SW GDYEM AD MDOZMB LAOTG AM TCERN ABW CPLG SLV BFAG R T MLI BD IB VUD C N M MA O TZA GC PVSLB SO M ND J OR STP IC MOW SM A Z N TO Q G NKN SG P SU R

net_trade

T
predicted_total_trade

E
1.0000 -0.0595 0.6414

T
1.0000 0.0752

-100

LSO KIR MLT H KG SG P KN A BR B BH R BEL MU S KIR SU R KN A BR B BH R BEL MU S MLT H KG SG P

C H SYC E

C AU T TTO YP D TGLD NN K SLVJIR L KIR COISR AM ONBH S GDTMR BLZ C O GREUGT J OR PR D U CM HKW RDLKA IMB GBG T BR N BGFINORNMYS KO NFRM N QPAN HITATU SEN TI A ESPB SW UPLIAMN GDL L N ZWHR RCBENYN FJ I WSYR PH A MAR TUHOMRIC EC BDOG SLEM MW GPOU JCHRMR PNBTN ON EGC LAOEI A K INPAKYESLB DGM NRSAU UMDISL O GZA AB VEN VN PERTHL MR DZAR TZA ARSASINOG BFA GAN CSOYEM IRCGG ETHEN BOZL ID L SDMOPNA G NCG CAN MLI CAPR AG UMEXIV BRZAFZ Y T AUNDZMB NAF TCER

CH SYC E CAU TTTO YP N L IR D SLVAMLD JOC N TGRD EUK BH ISR MB PRRKWS C H ID J NC ORBGTIU N OIC MHFR A T R GGBLZ PAN O TM GITA LKAPO TUNME N BGMYS D FJR KO N BENR U SEN PLISL DWM ON G N QBDRPHBROSYR ESP FIN BTNAEC G N LAOTIRR L ZW PAK SU MARIV TUU SLBBGHSWMLR MN IMWZL THYAIO HYPN EGMEX Y KENL GCL IN GSLE AN VN PRPER MDINDH O GZAF TZASDJNHZAAB BFACSAU ZMBIRSA G ETHT A MRCN MO ZYEMNARNG N G A SO MUAFCDSGR MLIERGO VEN CNPNAG O U AN AU BR ZAR TC BOMR DID BH R N OR MEX LVEN CO SAU C ZA O CZL G N NDN TTOG A IDIV SWLD N E ESPAG AB FR JUITAA AM BR PER SA KO R BO L MR T ZMBSLE MLTCH E CSDAU T AF PAN G R NMR D CC O SEN MDDTM G N BGGBLZ SYR TCTUL PRGM KEN PHA TU T N IN TGH NR J SLBBFAO D O RMLIER MAR SLVY LKA PAK BEN BG EG D C PV VU T W SM

20 0 -20 -40

BH R N OR MEX VEN C O LC O G SAU TTO DIDGIV A ZA N NC G ZL N SW E ESP AB FR AN LD ITA J BRSA LR AM A PER MR UBOAU TT PAN KO SLE C NOZMB MLT CSEN G MRM RG SYR SDDAFLT E MD D N NTU B TCER TUHC HBLZ RA GPHTG O NTM INGKEN SLB DPR SLV LKA PAKY J OR BEN BFA MLI BGMAR D EG C PV VU T W SM

BH R N OR MEX CO SAU CVENL G CN IV TTO DOZL NNZA IDG A E N G AB SW ESP A BR A FR J AMLD U PERPAN AU T SA ITA BO L SLE MR KO R T ZMB G C AFSENR C C MR DO CHE SDD G GN N MD SYR G NP TCKENRM T PH B TU BLZ G TU TM N ERHJL TG O IN D A R SLB MAR PAK BEN BFALKA SLV MLIBGO R EG Y D

MLT

predicted_net_trade

T E T E

1.0000 -0.0641 0.6312 0.2058

1.0000

200

400

600

100

200

300

Figure 3: Actual-Predicted Trade Correlation Matrices for Net-Trade Specifications (1) to (8)

35