The role of political and institutional factors in Central Asian trade integration : evidence from the gravity model

Abstract

With the gravity model of trade, this thesis analyzes political and institutional influences on trade integration among Central Asian countries. It tests how these factors: GDP (economic size), FDI inflows, political stability, and control of corruption affect mutual trade transactions throughout twenty-four years in the region from 2000-2023. The research applies panel data regression analysis using multiple estimation methods: Pooled OLS, Fixed Effects (FE), Random Effects (RE), Poisson Pseudo Maximum Likelihood (PPML), and Driscoll-Kraay standard errors, which account for heteroskedasticity, autocorrelation, and cross-section dependence. Completeness checks and model selection tests such as the F-test, LM test, and Hausman test verify that fixed effects is the preferable estimator in terms of bias and inconsistency due to the correlation with unobserved heterogeneity and regressors. Other diagnostic checks, like the Breusch-Pagan test, along with a correlation matrix and VIF, were performed to evaluate the trustworthiness of the dataset alongside its validity. The findings include higher trade values due to increased GDP from the exporting country, as well as inflow of foreign direct investment, which are positive influences on proving gravity theory's core claims. Moreover, control of corruption has a strong positive impact on trade flows, which highlights institutional quality concerning its significance. On the contrary, political stability as well as GDP from importing countries tend to be non-influential or reveal contradictory impacts throughout various estimations. It explains the importance of non-economic factorssuch as governance and stability in determining trade relations. It also emphasizes the need for effective reform at the level of institutions to enhance transparency and improve the investment climate in order to promote regional economic cooperation. This study distinctly signifies evidenceinformed strategies towards advancing intra-regional trade within Central Asia, whilst showcasing how enhancing domestic governance frameworks can rival improving infrastructure for facilitating trade diplomacy.