International Economics

Term Report

Student names: Syed Bilal Hazim Tabrez and Faiza Sibtain.

Faculty Name: Sir Amir Sohail.

Table of Contents
Abstract:......................................................................................................................................................3
Introduction:................................................................................................................................................3
Literature review.........................................................................................................................................4
Methodology:..............................................................................................................................................6
References:..................................................................................................................................................7
Potential of Pakistan trade with SACU
countries in rice commodity: An
application of Gravity Model
Name: Syed Bilal Hazim Tabrez and Faiza Sibtain

Abstract: The research is based on rice trade between Pakistan and SACU (South African Custom
Union) countries from the period ____ to ____ using gravity model and panel data analysis.

Keywords: Rice exports, GDP, Exchange rate, distance,

Introduction:
Globalization has brought about many fundamental changes in economic activities, both domestically and
internationally. One crucial component of economic integration is trade liberalization. The primary pillars
in this regard are the World Trade Organization (WTO), the World Bank, and the International Monetary
Fund (IMF).

The existence of free trade agreements and economic integration has also been characteristics of the
economic development. The most prominent example of this kind of economic integration are the
Association of Southeast Asian Nations (ASEAN), the North American Free Trade Agreement (NAFTA),
the South Asian Association for Regional Cooperation (SAARC), Economic Cooperation Organization
(ECO) and so-on. By embracing this regional integration, many nations are refocusing their efforts in
order to foster economic growth.

Rice production accounts for 20% of total world calories which is consumed and is the staple found in the
diet of people in the world. Trade has a significant role in a country's economic development. In fact, it
also affects the supply of consumables, since there are two ways to ensure that food is available in a
nation: first, through domestic food production, and second, through international trade. Agriculture is
main cash cow for Pakistan real exchange; the agriculture trade gives jobs to almost 60% of Pakistan’s
population. Rice contributes almost 1 quarter of the entire GDP to Pakistan’s GDP. Although the
agriculture sector is the largest in Pakistan, its share of the GDP is steadily declining. Its primary causes
include a lack of electricity, a decline in foreign direct investment, the inaccessibility of agricultural loans
for small farmers, and low productivity lead to low exports.

Cotton, rice, wheat, and sugarcane are the four main crops of Pakistan that account for 28% of
agricultural growth and 5.9% of the GDP of the nation. In Pakistan during the year 2021/2022 the rice
production is 4.5 million tons and for 2022/2023 this is expected to be 8.3 million tons. Pakistan ranks
1oth among the top producers of rice in the world and it follows; China, India, Indonesia, Phillipine,
Bangladesh, Vietnam, Brazil, Thailand and Myanmar. In Pakistan rice production is done on plains that
are available in two provinces namely: Sindh and Baluchistan.

The purpose of the research is to investigate the trade between Pakistan and Union of countries under
SACU (South African Custom Union) which includes: South Africa, Lesotho, Botswana, Swaziland and
Namibia. Pakistan exports different categories of rice to South Africa including; Husked Rice, Brown
Rice, Rice in Paddy and semi-milled rice. Whereas Pakistan exports semi-milled rice to Namibia and
Botswana.

This research study is written as follows, first an abstract in which a gist of whole research is briefly
summarized, then introduction part is written which contains a broader spectrum of whole research, after
that previous articles and similar works done is written which is followed by methodology, results of the
study and then conclusion is written as a summary of what the literature entails and what are policy
implications for future research.

Literature review

In a research by Tansey and Touray on Africa, they used gravity model to analyze trade between
developed and developing countries, they saw that trade between two countries increases with increase in
GDP of the two countries. While variables like distance between the two nations if increased tends to
increase transportation costs, along with that creates barriers like common language and whether the
country was part of any colony previously in the past. Another result which they reached was as the
country become more developed and richer then its imports also increase from similar developed
countries. While in the case of African nations the exports did not increased in a similar way as the GDP,
perverse as the income of exports increased the percentage increase in exports was not that great. Hence it
led the authors to the conclusion that growth in GDP of African countries did not help it increase trade
with other developed countries. (Tansey, M.M. and Touray, A., 2010. The gravity model of trade applied
to Africa. International Business & Economics Research Journal (IBER), 9(3).

In a study by Ahmad and Garcia in 2012 of Pakistan’s exports of rice to 92countries using panel
data by using gravity model approach, in the research the authors noted that Pakistan’s export
potential must be increase so that it could increase its rice exports. And for this to achieve
government of Pakistan must put in measures to raise the total yield per year by either improving
its soil quality, using HYV (high yielding variety) seeds, also increase the availability of water
and fertilizers and giving easy loan facilities to the farmers. Also measures should be undertaken
to reduce post-harvest losses that is currently at 16% of the total. Another factor is the exchange
rate which positively and significantly effects Pakistan’s rice exports, distance between partner
countries is used as proxy variable, also the British colonial places and areas are used as an
important variable, South Africa was also one of that and Pakistan should exploit more
opportunities to reach these markets (Ahmad, B. and Garcia, R.J., 2012).
In a research paper on trade potential of Pakistan by using gravity model by scholars of Punjab University
in 2015 they used a panel data approach in which data from the year 2000 to 2013 was undertaken. The
authors highlighted Pakistan’s important trading countries including Norway, Philippines, Portugal and
Greece. Major exports of Pakistan to countries included; Germany, France, Italy, Spain. While imports
from countries into Pakistan are; UAE, China, Kuwait, South Africa, Japan, Germany and so-on. In the
research the authors found that Pakistan has already exhausted all its trade potential against China due to
having considering level of imports and exports. And is having potential for exports from Switzerland and
Hungary. And for imports Pakistan has potential with Norway, Philippines, Portugal and Greece because
it has huge potential for trade with these countries and remains to be tapped. (Sultan, M. and Munir, K.,
2015).

In another study by Javed 2016, on trade relationship between Pakistan and UAE (United Arab Emirates)
in wheat and rice commodities in which they used gravity model approach by using panel data that
showed population of Pakistan which is on an increase is causing an annual decrease of 1.13 percent.
While on the other hand an increase in population of UAE will increase trade by 0.23 percentage. So
Pakistan need to employ economies of scale for its agricultural products so that it could increase its trade
with the trading nations, and target those countries which are having a larger population base in order to
increase its exports and to improve its foreign exchange (Javed, I., Ashfaq, M., Adil, S.A. and Bakhsh, K.,
2016).

In a study between Pakistan and China trade using gravity model and includes data on agriculture exports
the authors founded in the study that Pakistan is having major exports with China compared to any of the
other neighbouring countries, so data for the year 2000 to 2014 was used a result which was arrived at
was that countries with large population bases do not import much agricultural produce because most of
the population is living in rural areas hence the country will not import agricultural output of other
nations. In the case of Pakistan distance variable was not much significant because of political tensions
between its border countries including India, Iran and except for Afghanistan and China Pakistan doesn't
trade with other border nation (Lateef, M etal. 2017).

In another research by Abdullah et al, in 2015 on Pakistan’s rice exports to the world from year 2000 to
2011 in comparison to other countries in the world. In the study it was found that relatively Pakistan is
having higher quality and is superior in quality in production of rice. (Irshad, M.S., Xin, Q. and Arshad,
H., 2018. Competitiveness of Pakistani rice in international market and export potential with global A
panel gravity approach. Cogent Economics & Finance, 6(1), p.1486690.

In a study by Irshad, Xin and Arshad the authors studied Pakistan’s rice competitiveness in the world in
which panel data was used by applying gravity model approach. In the study the authors used PPML
(Poisson Pseudo Maximum Likelihood) approach to remove issue of heteroscedasticity in the data. Data
from year 2003 to 2016 was undertaken. Several dummy variables were further added to the model apart
from income, distance and export like; exchange rates, common border between trading countries and per
capita GDP. In the study it was seen that Pakistan’s basmati rice is widely recognized for its long grains
and aroma which gives Pakistan an edge over other countries like Thailand, India, China Vietnam and so-
on, a 1% appreciation in exchange rate lead to a 1.06% decrease in rice exports. (Irshad, M.S., Xin, Q.
and Arshad, H., 2018).
In another research by Kiani in 2018, on Pakistan’s agriculture exports, included rice and cotton as the
major products which accounts for most of the foreign exchange earnings. The study was based from the
year 1984 to 2014, and in that a finding was that distance factor negatively affected exports and common
border along with GDP of neighboring countries positively affected the exports earnings. Gravity model
was used to evaluate the variables under which GDP of Pakistan and another partner country was chosen,
also distance and common border between them was used. Pooled data technique was used along with
REM (Random Effect Model) to analyze results. (Kiani, A., Ijaz, F. and Siddique, H.M.A., 2018).

In a study by Luhwago 2020, the author analyzed rice exports by Tanzania by comparing it with other
major exporting countries including Pakistan, India, Thailand, Spain, USA, Cambodia and so-on. Also
the author took reference from another study by Abdullah in which the author revealed that Pakistan is
highly competitive in terms of rice exports in the international market because the price of Pakistani rice
is much lesser compared to its competitors especially India which is the top seller in international market
in terms of seller, and it is because the rice is not a principle diet in Pakistan’s cuisine, hence Pakistan
exports most of the rice in foreign market. Another reason pointed out by the author was that Pakistan
share common border with its neighboring countries including India, China, Afghanistan and India which
reduces the transportation costs to a most extent. In this study author used revealed comparative
advantage and in the analysis the result showed value of 0.24223 which is <1 hence it means that
Tanzania is less competitive compared to India and Pakistan which is because it has a lower quality of
rice seeds (Luhwago, W., 2020).

In another study by Chaudary and Saleem in 2018 on comparative advantage, market diversification and
trade instability, in that the study used indices like comparative advantage index, export instability and so-
on. So in that the result concluded was that there was a mismatch between what Pakistan is exporting and
the other countries really wanted to import. And the reason behind was because of aggressive trade
policies and a diversified exports and potential markets. (Kandjii, C., 2022).

Methodology:
To understand those factors that are behind rice exports of Pakistan towards the SACU (South African
Custom Union) countries those included: South Africa, Namibia, Swaziland, Botswana and Lesotho. We
used gravity model which is based on Newton’s gravitational law that says two imaginary bodies attract
each other in a similar force according to their weight but are negatively related to their distance. So the
trade prospect of Pakistan with these union countries of South Africa is analyzed by using gravity model.
It was first introduced by Tinbergen in the year 1962, in its basic form the model look like this:

According to the model it states that country’s trade is directly related to its similar other country and is
inversely related in the distance between them. Tinbergen (1962) relate the Newtonian’s Gravitational
force with bilateral exports (𝐄𝐢𝐣) and Masses are related with GNP of both countries that is the proxy for
economic size. He used Distance as a proxy for transportation cost that inversely effect trade volume
between countries.
However, in the study we will use below mentioned model to further understand the degree of trade
relation between Pakistan and SACU countries:

RXij = F(GDPij, Yi ,Yj, Dij, EXRij) (i)

Key:

 RX= Rice exports from Pakistan to SACU countries

 GDPij= GDP of Pakistan and SACU countries
 Yi and Yj= Income of Pakistan and SACU countries
 Dij= Distance between Pakistan and SACU countries
 EXRij= Exchange rate between Pakistan and member of SACU countries.

Applying log on right hand sides of equation (i) will become:

RXij=αo+α1LnGDPij+α2LnYi+α3LnYj+α4LnDij+α5EXRij (i)

References:

Ahmad, B. and Garcia, R.J., 2012. Measuring commodity-specific trade determinants and Export
Potential: a gravity model of Pakistan's rice exports. Journal of International Agricultural Trade
and Development, 8(2), p.125.

Irshad, M.S., Xin, Q. and Arshad, H., 2018. Competitiveness of Pakistani rice in international market and
export potential with global world: A panel gravity approach. Cogent Economics & Finance, 6(1),
p.1486690.

Javed, I., Ashfaq, M., Adil, S.A. and Bakhsh, K., 2016. Analysis of agricultural trade between Pakistan
and United Arab Emirates: an application of gravity model. Journal of Agricultural Research
(03681157), 54(4).

Kiani, A., Ijaz, F. and Siddique, H.M.A., 2018. Determinants of Agricultural Exports of Pakistan: An
Application of Gravity Model. Dialogue (Pakistan), 13(4).

Kandjii, C., 2022. Assessment of Namibian Agricultural export diversification and trade
complementarity (Doctoral dissertation, Namibia University of Science and Technology).
Luhwago, W., 2020. Determinants of Rice supply for export markets in Tanzania (Doctoral
dissertation, Sokoine University of Agriculture).

Lateef, M., Tong, G., Abdullah, M., Mazhar, N.I., Ahmad, Z. and Usman, M.R., 2017. Finding impact of
Pakistan-China free trade agreement (PCFTA) on agricultural exports of Pakistan-gravity model
approach. International Journal of u-and e-Service, Science and Technology, 10(8), pp.81-90.

Sultan, M. and Munir, K., 2015. Export, import and total trade potential of Pakistan: A gravity
model approach.

Tinbergen, J. (1962). Shaping the world economy; suggestions for an international economic
policy. Books (Jan Tinbergen).