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Institute for International Integration Studies IIIS Discussion Paper - page 19 / 41

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Population (of both the importer and exporter) has a negative impact on imports. Again, this reflects that larger countries may be less likely to import or export certain types of services, instead they may rely more on internal trade flows.

Government Services

The first panel in table 6 shows the results of the standard gravity model applied to imports of government services. The estimated coefficients using the HTM are quite different from the other service sectors and don’t correspond to the standard gravity model findings. The only statistically significant variable is the GDP per capita of the exporting country. The reason for this is unclear. It suggests that a country needs a sufficiently high level of income before it may begin to export government services.

In an attempt to augment the standard gravity equation for imports of government services, equation (4) is estimated. The additional variables included measure the perceived effectiveness of the provision of public (government) services in the importing and exporting countries (see appendix for further discussion of this variable). The results of equation (4) are shown in the second panel of table 6, the new variables have no statistically significant effect on the import of government services.

i j t i j 1 i t 2 j t 3 i t 4 j t 5 i j 6 i j 7 i j 8 i j 9 i 1 0 j t i j t l n M = + l n G D P p c + l n G D P p c + l n P o p + l n P o p + l n D i s t a n c e + A d j a c e n c y + L a n g u a g e + E U + l n G o v t E f f + l n G o v t E f f + + α β β β β β β β β β β θ ε

(4)

Commercial Services

For other commercial services (not included elsewhere), the HTM is found to be best specification. The results of estimating equation (1) are shown in the first panel of table 7. Only GDP per capita (of both countries) and language are found to be significant and all three have positive coefficients. It is reasonable to assume that commercial services rely even more on wealth than the other service categories and this is shown in the relatively large coefficients on GDP per capita. This type of service is also likely to depend heavily on person to person communication and a common language promotes higher levels of trade.

To explore the possibility that trade in commercial services may be sensitive to the investment climate in countries, even more so than the other services categories, equation (5) incorporates a broad measure of economic freedom in the importing and

e x p o r t i n g c o u n t r i e s ( β 9 E c o F r e e i a n d β 1 0 E c o F r e e j a r e d e s c r i b e d i n d e t a i l i n t h e a p p e n d i The results, in the second panel of table 7, indicate that only the level of economic freedom in the exporting country significantly influence commercial services flows. However, the positive sign of the coefficient is counter-intuitive. A lower value of the x ) .

v a r i a b l e ( β 9 E c o F r e e i ) i n d i c a t e s g r e a t e r e c o n o m i c f r e e d o m , t h e r e f o r e a p o s i t i v e c o e f f i c i e n suggests lower economic freedom in the exporting country encourages exports of services. t

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