Economic Integration in Persian Gulf Countries; A Spatial Econometrics Approach

On the theory, integration among countries that have common economic as well as political benefits, such as Persian Gulf Countries, may result in resource reallocation, an increase in products, trade and then economic welfare for members. This paper investigates the effect of trade integration on international trade flows among the members, using the trade gravity model. The contiguity effect must be considered because of spatial dependence of the member countries. These countries have some common borders and therefore, spatial dependence among them affects their trade flows. Also, the paper addresses the question of extent the contiguity factor can influence the intra-trade flows of the members. The estimation results show that the spatial dependence hypothesis is confirmed in the model. Moreover, the coefficient of integration variable reveals the fact that trade flows among Persian Gulf countries are below potential level. Therefore, these countries should remove trade obstacles to benefit from potential trade as well as comparative advantages.