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A GRAVITY MODEL APPROACH to ANALYZING the TRADE PERFORMANCE of CARICOM MEMBER STATES ALLEYNE, Antonio1 LORDE, Troy Abstract

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A GRAVITY MODEL APPROACH to ANALYZING the TRADE PERFORMANCE of CARICOM MEMBER STATES ALLEYNE, Antonio1 LORDE, Troy Abstract Applied Econometrics and International Development Vol. 14-2 (2014) A GRAVITY MODEL APPROACH TO ANALYZING THE TRADE PERFORMANCE OF CARICOM MEMBER STATES ALLEYNE, Antonio1 LORDE, Troy Abstract This study examines the trade flows in commodities for CARICOM countries through the utilization of the traditional gravity model for international trade. Per capita GDP differential, trade to GDP and language all impact trade positively. On the other hand, geographical distance, exchange rate and unexpectedly, historical trade relationships have negative effects on trade. The results suggest that management of the exchange rate is critical and that CARICOM countries may be served better by trading with countries with higher living standards. Keywords: CARICOM, gravity model, bilateral trade, economic integration JEL classifications: F10, F14 and F15 ______________________________________________________________________ 1. Introduction The introduction of the Caribbean Free Trade Association (CARIFTA)2 in 1965 provided the initial catalyst for the enhancement of trade within the Caribbean region. Following the enactment of the Revised 1973 Treaty of Chaguaramas and the establishment of the Caribbean Community (CARICOM) special alliance of nations (Single Market and Economy) in 2001,3 a primary objective became the strengthening of relationships to provide an impetus for greater economic integration and cooperation among members. At present, members continue efforts to enhance intra-regional trade while working to improve international trade to quicken the pace of development. Despite the aforementioned initiatives, evidence suggests that total trade in CARICOM has been quite restrained, despite open markets access amongst members (Ramjeet 2009). Results published by the Caribbean Trade and Investment Report (CTIR) in 2010, support the view that the existence of significant imbalances in the growth of trade is a direct result of the increase in imports from non-CARICOM sources out- pacing the rate of expansion of exports within CARICOM (CARICOM Secretariat 2010). 1 Antonio Alleyne ([email protected] / [email protected]) Research and Planning Unit, Ministry of Finance and Economic Affairs 3rd Floor East, Warrens Office Complex, Warrens, St. Michael, Barbados. Troy Lorde, Department of Economics, The University of the West Indies, Cave Hill Campus, Barbados 2 CARIFTA was comprised of Antigua and Barbuda, Barbados, Guyana, and Trinidad and Tobago. 3 The grouping comprises Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago. Applied Econometrics and International Development Vol. 14-2 (2014) As a consequence of special trading arrangements with Europe, CARICOM countries enjoyed the benefits—in terms of real income growth, employment and foreign exchange earnings—derived from agriculture (mainly sugar, bananas and other primary crops) and merchandise trade with extra-regional markets. However, this type of asymmetric trading later became incompatible with the World Trade Organisation’s (WTO) fundamental rule; that is, a trade agreement must open up “largely all trade” between two partners. Comprehensive, symmetric and WTO compliant frameworks for bilateral trade between CARIFORUM4 countries and Europe—Economic Partnership Agreements (EPA)—were thus signed in Barbados in 2008. Elimination of preferential trading agreements suggested that the region would have to make greater choices among alternative paths. According to Lorde, Alleyne and Francis (2010), the EPA will bring with it significant challenges for the region. Notwithstanding the challenges, the substantial change in the economic environment can present opportunities for economic restructuring, development and institutional framework enhancements for all member countries (Lorde, Alleyne and Francis 2010, Rahman 2004). The export-led growth hypothesis suggests that the expansion of aggregate exports have a favourable impact on economic growth (Balaguer and Cantavella-Jorda 2004). Feder (1983) argues that the assignment of productive resources to external demand- oriented sectors is a very important factor in eliminating allocated inefficiencies and increasing output levels. Moreover, the efficiency that can be found in external demand-oriented sectors is often prompted by the need to attain increased competitiveness in international markets. Therefore, with the new dispensation of more reciprocal trade, the focus of trading in primary products has been called into question, when seeking the best avenue for sustained economic growth and development. Considering that over the review period of this study, a significant portion of commodity trade (particularly imports) takes place with the developed world (Table 2), the impact of trade liberalization on Caribbean regional development is unclear. Regional signs point to a need for increased expansion in international markets, as intra-regional trade appears to show marginal promise for growth. It is thus important for CARICOM members to identify the countries, or regions, where the greatest potential for revenue gains exists. Hence the primary objective of this paper is to empirically examine the critical factors explaining trade flows in CARICOM. The paper is organized as follows. The next section provides a review of trade within CARICOM. Section three presents a review of the relevant literature on trade flow determinations. Section four introduces the empirical model, econometric methods and data used in the analysis. The results and analysis are presented next. The final section provides some concluding remarks. 2. CARICOM trade Several years after the 2008 global financial crisis, most CARICOM economies, particularly those heavily dependent on tourist travel from Europe and the USA, remain suppressed as a result of the prolonged financial turmoil in Europe and the 4 CARIFORUM is a grouping of CARICOM countries, excluding Haiti, and including the Dominican Republic. 146 Alleyne,A., Lorde,T. A Gravity Model Approach and Trade Performance of CARICOM States slowed economic recovery of other developed markets. However, high trade prices have resulted in increased growth in the commodity-based economies within the region, such as Guyana, Haiti and Suriname. Despite relative proximity to large consumer markets, CARICOM countries continue to be confronted with significant challenges. Small size, high transportation and production costs act to impede their competitiveness. The EPA, though, provides a window of opportunity regarding new prospects for technical cooperation and trade development. At the same time it opens the door for several new and existing market niches to be exploited. Notwithstanding, the global trading environment continues to be confronted by what has been branded as the worst recession since the 1930s. This has led to fewer opportunities for financing (trade or otherwise) in the region, compounded by the fact that the Caribbean credit market remains underdeveloped (Caribbean Centre for Money and Finance 2010). CARICOM economies remain below pre-recession levels of economic growth, recording either very low or negative growth rates, leading to deterioration of trade growth. Over the period 2000-2011, most member states registered annual commodity trade performance above 50.0 per cent of GDP (see Table1). Despite a noticeably declining trend, the region’s average remained above the world average for the same period. Only the Bahamas, Haiti, Jamaica, and St. Lucia showed a generally improving performance. Table 1 - Merchandise Trade (% of GDP) Country Name 2000 2005 2010 2011 Antigua and Barbuda 58.3 58.8 47.7 46.9 Bahamas, The 41.9 37.1 42.4 48.8 Barbados 55.8 65.4 48.6 61.6 Belize 89.2 71.8 71.8 83.3 Dominica 61.9 57.3 54.8 51.6 Grenada 54.8 50.8 43.5 45.5 Guyana 150.3 162.6 100.8 112.5 Haiti 36.9 46.3 56.1 50.0 Jamaica 51.4 56.6 48.8 57.1 St. Kitts and Nevis 55.0 45.6 47.6 42.1 St. Lucia 52.1 60.5 71.8 68.4 St. Vincent and the Grenadines 52.8 50.8 56.2 53.8 Suriname 103.7 114.1 78.4 96.3 Trinidad and Tobago 93.0 97.2 83.4 102.3 Caribbean Small States5 65.7 72.6 65.7 75.9 World 40.6 46.7 48.5 52.3 Source: World Trade Organization, and World Bank GDP estimates 2013 5 Caribbean small states include Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. 147 Applied Econometrics and International Development Vol. 14-2 (2014) Table 2 CARICOM Imports and Exports Total Intra-Regional CARICOM Trade (US$ Billion) 2000 2005 2010 2011 Imp Exp Trade Imp Exp Trade Imp Exp Trade Imp Exp Trade orts orts Bal. orts orts Bal. orts orts Bal. orts orts Bal. Antigua and 0.04 0.01 -0.03 0.09 0.03 -0.06 0.04 0.01 -0.03 0.04 0.01 -0.03 Barbuda Bahamas 0.01 0.00 -0.01 0.01 0.00 -0.01 0.07 0.01 -0.06 0.17 0.00 -0.16 Barbados 0.23 0.12 -0.11 0.41 0.14 -0.26 0.13 0.13 0.00 0.60 0.20 -0.40 Belize 0.01 0.01 -0.01 0.01 0.02 0.01 0.01 0.02 0.00 0.02 0.03 0.01 Dominica 0.04 0.03 -0.01 0.05 0.02 -0.03 0.05 0.03 -0.03 n.a. n.a. n.a. Grenada 0.06 0.01 -0.05 0.09 0.01 -0.08 n.a. n.a. n.a. n.a. n.a. n.a. Guyana 0.10 0.08 -0.02 0.28 0.11 -0.17 0.47 0.12 -0.35 0.42 0.17 -0.26 Jamaica 0.40 0.05 -0.35 0.83 0.05 -0.78 0.83 0.07 -0.76 1.03 0.07 -0.96 Montserrat 0.00 0.00 0.00 0.01 0.00 -0.01 n.a. n.a.
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