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How Far has Trade Integration Advanced? An analysis of actual and potential trade of three Central and Eastern European countries

Author

Listed:
  • Zoltán M. Jakab

    (Magyar Nemzeti Bank)

  • Mihály András Kovács

    (Magyar Nemzeti Bank)

  • András Oszlay

    (Magyar Nemzeti Bank (at the time of writing the study))

Abstract
This paper investigates the trade integration of three Central and Eastern European countries, namely the Czech Republic, Hungary and Poland, using the gravity model for trade as an analytical device. Beside the usual variables in such a model, we have also incorporated the FDI variables. According to our results, in the context of the most important Western European relations, it is Hungary that achieved the highest level of integration. Czech exports have also integrated, but there is still a very considerable potential there. Poland has integrated in exports to a much smaller extent than in imports. CEFTA-oriented trade has also gone up considerably, although the level of actual trade has not yet reached its full potential, except in the Czech Republic. Vis-a-vis South-East Asia, we have found overintegration for imports, but could see no signs of convergence for export towards this region. Our estimates support the trade-enhancing role of bilateral FDI. Paradoxically, the potential trade of the three countries estimated with FDI variables appears to be less than that suggested by the basic setup of the gravity model. We formulated two hypotheses to explain this, and supported one by a probit model. Finally, we tested for convergence and found that actual data indeed converged toward the estimated trade potential.

Suggested Citation

  • Zoltán M. Jakab & Mihály András Kovács & András Oszlay, 2000. "How Far has Trade Integration Advanced? An analysis of actual and potential trade of three Central and Eastern European countries," MNB Working Papers 2000/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2000/1
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    References listed on IDEAS

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    1. repec:fth:michin:339 is not listed on IDEAS
    2. Alan V. Deardorff, 2011. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 24, pages 267-293, World Scientific Publishing Co. Pte. Ltd..
    3. Feenstra, Robert & Markusen, James R. & Rose, Andrew K, 1998. "Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," CEPR Discussion Papers 2035, C.E.P.R. Discussion Papers.
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    Full references (including those not matched with items on IDEAS)

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