Structural Gravity Model and Globalization: An Empirical Analysis between Bangladesh, China, India and Pakistan

Abstract

The globalization process during last two hundred years has influenced the world’s social, cultural and economic positions. Consequently, world’s output, trade and population have been increased significantly. As a result, wellbeing of nations has been improved. However, at the same time in equality among the rich and poor nations of the world has also increased which is evident from the “Gini coefficient” reported by the World Trade Organization (WTO), 2013. Therefore this study aims to investigate export determining  factors for four neighboring countries namely China, India, Pakistan and Bangladesh. It is an empirical analysis based on the structural gravity model. The study employees a relatively new technique of panel data (PPML-Estimator) for the comparison between countries. The findings reveal that factors such as income, expenditure and geographical distance in all four countries are in line with the theoretical literature as well as consistent with gravity theory. However, the dummy variables for language, contiguity and the Regional Trade Agreement (RTAs) have mixed results. Notably, the RTAs in case of China, India and Pakistan have negative and significant impact. In another model, in order to capture the impact of globalization, this study used overall globalization index (GI) and its proxies like Political Globalization Index (PGI), Social Globalization Index (SGI), Economic Globalization Index (EGI) and Information Flow Index (IFI). The results suggest that the proxies have mixed results whereas; the overall globalization has positive and significant effect on the exports. On the basis of these finding, it may be concluded that political conflicts among these neighboring nations are the main hurdle for their mutual beneficial trade. Although, Pakistan’s socio-economic set up is responsive towards globalization wave however, factors like poor management, energy crises, corruption and terrorism have hampered its trade performance.