The Gravity Model and the Test for the Regional Integration Effect: The Case of Tanzania

Abstract

This paper demonstrates that the appropriate econometric technique of testing for the effect of regional integration on bilateral trade is to augment the standard gravity model with country specific dummies instead of regional integration dummies. Using data on bilateral trade between Tanzania and her 23 trading partners over the period 1980–2004, the paper reports three important results. First, contrary to results from the traditional approach, estimates from the new econometric technique indicate that both the EU and the EAC have had moderate trade creation effects on Tanzania’s bilateral trade. Second, I find that Tanzania’s non-traditional trading partners such as Japan, India, Singapore, Hong Kong and the USA are relatively more opened to Tanzania’s exports. Third, the results also indicate that whereas it is difficult for Tanzania’s exports to penetrate foreign markets, foreign goods easily penetrate Tanzania’s market. The policy implication is that the government should continue with its efforts to strengthen the EAC, and to gain more exports market to the non-traditional trading partners, if the export growth development strategy is to become a reality in Tanzania.