The erosion of colonial trade linkages after independence
Introduction
The dismantling of European empires after World War II led to sweeping changes in the governance of developing countries in Africa and Asia. Recent research in economics has investigated the long-run consequences of colonial rule. La Porta et al. (1998) argue that the British endowed their colonies with a legal system that produces superior economic outcomes. Acemoglu et al., 2001, Acemoglu et al., 2002 find that colonizers were more likely to establish pro-growth institutions in sparsely populated areas with lower settler mortality. Banerjee and Iyer (2005) find that 50 years after India abolished land revenue systems that the British imposed in the mid-19th century, their “institutional overhang” manifests itself in agricultural productivity differences. Huillery (2009) shows that uneven colonial investment partly explains current income inequalities within former French West Africa. In this paper, we investigate a different legacy of colonial rule: the bias in post-colonial bilateral trade patterns.
Algeria's trade with France offers prima facie evidence of large post-colonial trade erosion. In 1962, the year of independence, Algeria accounted for 8.8% of French imports, a share that had been stable over the preceding 14-year period. The share fell by two thirds over the next two decades (to 2.7% in 1984) and another two thirds over the succeeding two decades, reaching 1.0% in 2006. A variety of potential explanations for this fact suggest themselves. First, it might reflect poor economic performance over the last four decades by Algeria, which may have reduced its exports to all markets. Second, Algeria's abandonment of the Franc in 1964 may have raised currency transaction costs. Third, France's participation in GATT and the European Community probably redirected its import purchasing patterns, lowering the share taken by any absolute level of imports from Algeria. Fourth, deterioration of business networks and trade-creating institutions may have raised bilateral trade costs.
Utilizing data encompassing almost every country in the world from 1948 and 2006, we identify the impact of independence based on within variation in bilateral trade. In a non-parametric specification, we estimate the effect of years since independence. Unlike the work cited in the opening paragraph, we will take as given any changes in per capita incomes caused by changing internal institutions. We also control for formal external institutions (membership in regional trade agreements, GATT, and currency unions). This allows us to focus on the effects of unobserved informal external institutions as well as the business networks emphasized by Rauch (1999).
Countries in colonial empires choose if and when to separate, raising the concern of endogeneity bias. As we discuss in Section 2, historical accounts suggest a significant random component to independence events. Nevertheless, systematic determinants of independence are a possible source of bias. The political and economic attributes of the colonizer (metropole) and colony, as well as the strength of their bilateral association, may affect the likelihood of independence. We remove these factors, however, in specifications that eliminate time-varying country effects and non-time varying bilateral effects.
We find that four decades after independence, trade between colony and metropole had fallen by about 65%. Our results are supported by a falsification exercise where we randomly create false colonial links (with random dates of independence) and find no evidence of independence effects for the countries in these false colonial relationships. We categorize independence events into amicable and hostile separations, and find that, while the latter are more immediately destructive to trade, both generate similar levels of trade erosion in the long-run.
We also investigate potential trade redirection by examining the effects of independence on trade with siblings (other colonies in the same empire) and trade with rest-of-world (ROW). Trade erosion with siblings is comparable to that of trade with metropoles. Trade also decreases with ROW. Finally, we examine the impact of independence on the extensive margin of trade. We find that independence has a strong, but gradual, negative influence on the probability of positive trade flows between the colony and metropole. However, we see small positive increases in the propensity to trade with siblings and ROW.
The paper proceeds as follows. In the next section, we describe our panel of independence events and bilateral trade data. Section 3 specifies a gravity model employing country-pair (dyad) fixed effects. Due to the computational difficulties of estimating country-year fixed effects to capture multilateral resistance terms, we eliminate them by implementing a method of “tetrads” that takes the ratio of ratios of trade flows. Estimates of the impact of independence on bilateral trade are presented in Section 4. The concluding section summarizes and interprets our results.
Section snippets
Data on independence and trade
The principal variable of interest is the timing of independence events. We define independence as arising at the end of a colonial period involving long-term, civilian administration that usually includes significant settlement. The end of a military occupation is not a sufficient condition for an independence event. Information on colonial relationships comes from a variety of sources but we used the CIA World Factbook as the primary authority for independence dates.
There are 255 country
Specification
In order to estimate the effects of independence, we need a benchmark for the amount of trade expected had independence not occurred. We will follow the common practice of modeling “expected” bilateral trade using a specification based on the gravity equation.
All the well-known empirical and theoretical formulations of the gravity equation can be represented in the following equation for the value of xijt, the exports from exporting country i to importing country j in year t:2
Results
Before presenting regression results, we begin this section by providing evidence of large independence effects using two instructive cases. Our main econometric results are discussed in Section 4.2 where we report estimates of the control variables and independence effects for six alternative specifications. In the following subsection, we conduct a falsification exercise to test whether the results are driven by spurious dynamics. Section 4.4 categorizes independence events as amicable or
Conclusion
We find that independence erodes colonial trade with the metropole and other countries in the colonial empire. On average, trade between a colony and its metropole declines by about 65% during the first 40 years of independence. Trade between siblings falls by a similar amount. Hostile separations lead to more immediate negative reductions in trade than amicable separations but long-run trade deterioration is similar for both. Trade erosion is not confined to the colonial empire—we also find
Acknowledgements
We thank the co-editor, the two referees, Gilles Duranton, Diego Puga, Patrick Francois, participants at seminars at UC San Diego, London School of Economics, Paris School of Economics, and the RSAI (2006) and ERWIT (2007) meetings for useful comments. We especially thank José de Sousa who generously contributed his data on regional agreements and currency unions, and provided many helpful suggestions.
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