Has Distance Died? Evidence from a Panel Gravity Model

The estimated coefficient of distance on the volume of trade is generally found to increase rather than decrease through time using the traditional gravity model of trade. This distance puzzle proved robust to several ad hoc versions of the model using data for 1962–96 for a large sample of 130 countries. The introduction of an ‘‘augmented’ ’ barrier to trade function removes the paradox, yielding a decline in the estimate of the elasticity of trade to distance of about 11 percent over the 35-year period for the whole sample. However, the ‘‘death of distance’ ’ is shown to be largely confined to bilateral trade between rich countries, with poor countries becoming marginalized. There is a widespread perception that the current wave of globalization, much like the first, should have led to the ‘‘death of distance.’ ’ Other things equal, globalization should generate a dispersion of economic activity reflecting a decline in transaction costs, especially transport costs. But studies based on the traditional gravity model of international trade—the workhorse for studies on the pattern of trade and the influence of transport costs—do not reach that conclusion. Although some studies based on the gravity model have used direct Jean-François Brun is associate professor of economics at the University of Auvergne; his emai