Participation of Developing Countries in New and Dynamic Sectors of World Trade: The South South Dimension

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1 Expert Meeting on Participation of Developing Countries in New and Dynamic Sectors of World Trade: The South South Dimension Geneva October 2007 The Trojan Horse Effect of Trade in Cultural Goods By Mathias Thoenig Professor, Département d'économie politique University of Geneva * The views expressed are those of the author and do not necessarily reflect the views of UNCTAD

2 The Trojan Horse Effect of Trade in Cultural Goods Mathias Thoenig University of Geneva

3 The impact of culture on economic variables - Recent rise of interest in the academic literature - Social capital & trust on long-run development - Fairness on Redistribution Today, we look at the interplay between International Trade and Cross-country Cultural Distance - Maystre and Thoenig (U.Geneva, 2007) - M. Fugazza (UNCTAD) and Thoenig (2007)

4 Trade in Cultural Goods : Some Facts Disdier, Tai, Fontagné, Mayer (CEPII 2007) Measurement problems: - Custom Data refer to the physical features of the goods not to their cultural content [e.g. Craft Industry in Developed Countries]; - Tracking back the origins [e.g. Outsourcing in the movie industry] - Intangible goods & information flows [peer-to-peer internet; Trading License in the Fast food industry] Data availability: trade in goods only; COMTRADE

5

6 Stylized Fact 1: The upward Trend in Cultural trade Impressive rise in trade of cultural Goods. Between 1980 and 1998, world imports of cultural goods have increased by 347% going from 47.8 to billion of US dollars (UNESCO, 2000). According to United Nations Comtrade data, world imports of all commodities increased by 189% between 1980 and An unexpected outcome is that in 1996, cultural products became the largest export industry of the United States, surpassing, for the first time, traditional manufacturing industries.

7 Stylized Fact 2: but unevenly distributed. Cultural trade flows are highly concentrated : most of world trade in cultural goods is the fact of a remarkably small number of countries. In 2002, the US, the UK, China (including Hong Kong and Macao), Germany and France accounted for 55.5% of total exports and 53.5% of total imports For global trade, these percentages were 39.7% for exports and 45.3% for imports.

8 South-South (1): «Direct» Welfare Effects of S-S Trade in Cultural Goods are likely to be small. Weak Demand: The share of the leisure industry goes hand in hand with economic development. 1970: 4.5% in the US, 4.9% in Canada,5.1% in the UK and 4.3% in France 2005: 6.4% in the US, 5.5% in Canada, 7.7% in the UK and 5.2% in France. (OECD, 2007) «Hegemonic» Markets: The markets for cultural goods are not easily contestable : evidence of strong hysteresis effect (addiction)

9 Market Potential. Share Import of Cultural Goods as a Share of Total Import in 2000 GRC VNM EGY COL SVKURY SVN IDN LTU PHL BIH ZWE YUG PER MAR KGZ MDA PAK BGD BLR MKD SLV BRA VEN IRQ DZA SAU NZL GDP per capita in 2000 (US $) CHE

10 Patterns of Specialization. Share Export of Cultural Goods as a Share of Total Export in 2000 UGA VEN SLV COL PER GRC MAR SVK EST HRV MDA YUG LVA GEO ZWE SVN ARM EGY DOM TZA PAK URY VNM AZE BGD UKR JOR MKD BRA ALB KGZ LTU PHL BLR DZA SAU IDNIRN NZL ISR AUS SGP CHE NOR GDP per capita in 2000 (US $)

11 South-South Trade (2): «Indirect» Welfare Effects of S-S trade in cultural goods can be large. The Trojan Horse: Theoretical Mechanism (A) Bilateral cultural Distance is a strong impediment to bilateral trade. A large part of the fixed costs of entry on the export markets are paid when setting business/social networks: Communication and informational costs [e.g. the diffusion of ICT has not reduced the need of face-to-face contacts between business representatives!] Contracting costs [e.g. different legal environments; trust in incomplete contract setting]

12 (B) Self-reinforcing dynamics: Positive feedback loop between trade and cultural change: - (i) Bilateral trade in cultural goods increases cultural proximity - (ii) Cultural proximity reduces fixed costs of entry on export markets for all types of goods - (iii) This may promote exports in all industries. We call Trojan Horse, this spillover effect of cultural trade on trade in other industries. The Indirect Welfare Impact of Cultural Trade may thus be large.

13 Trojan Horse: some evidence Reverse Causality Issue! Statistical Identification is tricky Lack of time to present the methodology [Panel; Instrumental variables; Difference-in-difference] A- We Build an Index of Bilateral Cultural Distance B- We show that Cultural Trade reduces Cultural Distance C- We show that a drop in Cultural Distance impacts all types of Trade Flows

14 A- Bilateral Cultural distance Kroeber & Kluckhohn (1952) enumerated 156 definitions of culture Three broad views: Material view (Archaeology; Primatology) Consumption and production habits Cultural goods Social view (social anthropologists) Social interactions Status Institutions System of beliefs (Cultural anthropo.; Economics) Norms Values Beliefs Opinions

15 We develop an index of bilateral cultural distance. Our index measures the average probability that two randomly picked individuals, between or within countries, do not share the same opinion, belief, value on a given dimension. We average across many dimensions (related to political, social, religious, economic life)

16 diversity between country-pairs 45 line between pair of countries diversity within country 45 line within countries Evolution of cultural diversity

17 B- Cultural Trade on Cultural Distance Dependent: diversity between countries Model: (I) (II) (III) bilateral openness a b [0.006] [0.036] ln (Ycap_o + Ycap_d) a a [0.011] [0.012] [0.078] ln ( Ycap_o - Ycap_d ) 0.060a 0.059a [0.008] [0.008] [0.015] distance (weighted) 0.028a 0.027a 0.01 [0.003] [0.003] [0.009] distance * year a a [0.001] [0.001] [0.003] common legal system a a [0.214] [0.218] [0.540] contiguity [0.003] [0.003] [0.009] language is spoken by at least 9% 0.013a 0.015a of the pop in both countries [0.004] [0.004] [0.007] genetic distance 0.007a [0.002] stock of foreign born [0.012] religious proximity a [0.008] year FE yes yes yes # obs R

18 Interpretation: 1 SD increase in Cultural Trade translates into 0.2 SD decrease in cultural distance This means that the historical increase of bilateral cultural trade over the period explains 25% of the observed trend in cultural convergence between countries.

19 C- Culture Distance on Trade (gravity approach - Comtrade) Dependent: homogeneous differentiated (no cultural) cultural Model: (VIII) (IX) (X) diversity_od b b [1.295] [0.838] [1.223] diversity_o a [1.114] [0.724] [1.069] diversity_d b 1.965a 1.814c [1.122] [0.728] [1.061] ln Y_o 0.419b 0.628a [0.187] [0.126] [0.162] ln Y_d 0.588a 0.379a 0.419a [0.188] [0.126] [0.162] ln (Ycap_o + Ycap_d) c [0.447] [0.297] [0.390] ln ( Ycap_o - Ycap_d ) [0.057] [0.039] [0.051] rta a 0.598a [0.180] [0.124] [0.168] gatt_o b a [0.221] [0.134] [0.166] gatt_d b 0.538a [0.221] [0.134] [0.166] year FE yes yes yes country-pairs FE yes yes yes X/M year FE no no no # observations R # country-pairs

20 Interpretation 1 SD decrease in Culture Distance increases total trade by 0.08 SD

21 Quantification of the whole Trojan Horse effect A 10% increase in cultural trade raises overall trade by 3.2%. Trade in cultural goods represents on average 1.4% of overall trade between 1988 and Between 1980 and 1998, world imports of cultural goods have increased by 347% going from 47.8 to billion of US dollars (UNESCO, 2000). According to United Nations Comtrade data, world imports of all commodities increased by 189% between 1980 and 1998.

22 Conclusion: Direct Welfare Effects of South-South trade in cultural goods are likely to be small. But Indirect Welfare Effect are likely to be large: there is a positive spillover of cultural trade on all types of trade. Cultural Convergence reduces fixed costs of entry on export markets in all industries. Active policies for promoting cultural industries and tourism.

23 Open Questions: Disentangle empirically the contribution to the Trojan Horse Effect of each of those channels : - FDI vs Trade - «Social Admixtures»: immigration; tourism We need DATA! Does the Trojan Horse Effect exist for other industries? Expansion on a given export market promotes exports on other industries (spillover)? Ongoing research with Marco Fugazza (UNCTAD)

24 Omitted Variables: Bilateral Trade: Goods & services; FDI Information Creative Destruction Or Bayesian Updating Bilateral Culture Distance Geography Past History (wars, etc.) Social Admixtures: Immigration Tourism Networks

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