How Far Has Trade Integration Advanced?: An Analysis of the Actual and Potential Trade of Three Central and Eastern European Countries

Abstract

We examine the development of potential and actual trade in the Czech Republic, Hungary, and Poland, using the gravity model for trade as an analytical device. However, recent literature indicates that the point estimates of the gravity equation for estimating trade potential are highly uncertain. Hence we base our conclusions on the concept of speed of convergence to potential trade. Examining only the dynamics of actual and potential trade is less dependent on the estimation methodology. Using panel error-correction models we find significant convergence to the estimated potential trade. We also give an explanation for the differences in the speed of convergence among the three countries based on the product-structure of exports and the effects of foreign direct investment. The conclusions drawn from our measure of the speed of convergence are robust across diverse estimation methodologies. J. Comp. Econ., June 2001 29(2), pp. 276–292. Economics and Research Department, National Bank of Hungary, H-1850, Budapest, Szabadság tér 8/9, Hungary. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: C21, C23, C50, F10, F11, F12, F15.