Has Distance Died? Evidence from a Panel Gravity Model

This paper reports panel gravity estimates of aggregate bilateral trade for 130 countries over the period 1962-96 in which the coefficient of distance is allowed to change over time. In a standard specification, in which transport costs are proxied only, it is found paradoxically that the absolute value of the elasticity of bilateral trade to distance has been significantly increasing. The result is attributed to a relatively larger decline in costs independent of distance (such as handling) than in distance-related costs (e.g. oil price). An extended version of the model that controls for these two factors eliminates this positive trend without reversing it. However, when the sample is split into two groups (‘rich-rich' and ‘poor-poor'), the paradox is maintained for the ‘poor-poor' group. While not conclusive, these results are consistent with the view that poor countries may have been marginalized by the current wave of globalization.