Study On The Determinants Of Trade In Services In EAC Partner States: Based On Gravity Model

Trade in services play a virtue role in economic growth especially in developing countries as it increases new job opportunities,productivity,value addition,export,skills as well as an engine for industrial development and other economic activities.However,trade in services act as important inputs in the production and export of goods,provide basic infrastructure that enhances trade in goods.In addition,trade in services act as a tool that connect electronic commerce and selling of services.Trade in services in East Africa Community has been showing the positive trend.Despite that trade in services in East Africa has been increasing and various reforms have been implemented for the development of trade in services but in the region trade in services flows are lagging behind in comparative with other region in the same continent.This paper empirically investigates the determinants of trade in services in East Africa Community partner states specifically Tanzania,Kenya,Uganda.This research particularly examines the impact of GDP per capita,Corruption Perception Index(CPI),Research and Development expenditure(R&D),Internet penetration,Skilled labor,Distance of capital cities between trading partners,Infrastructure facilities and Regional Trade Arrangements(RTAs)which is treated as dummy variable on trade in services flows in EAC context.The study employs secondary Panel Dataset on the sample of 3 countries for the period of 17 years from 2000-2016 to examine the determinants of trade in services in EAC partner states.The study adopted the gravity model and employed a series of panel data estimations(Pooled OLS,Fixed,Random effect)and with application of Hausman test,Random Effect Model was appropriate as the main estimation technique with the help STATA software.The empirical results of Random effects model confirm that R&D expenditure,Skilled labor,GDP per capita,Internet penetration,Infrastructure facilities and Distance are significant determinant of trade in services in EAC partner states.The finding reveals that Corruption Perception Index,and RTAs are insignificant.The coefficients GDP per capita,Research and Development expenditure,Corruption Perception Index(CPI),Skilled labor,Internet penetration variables are positive which implies that these variables influence trade in services flows in EAC partner states.The results indicate that RTAs,Infrastructure and Distance have negative coefficient.On the basis of the empirical findings,this study contributes to many policy implications.These policy implications involve creating favorable business environment for the increase of trade in services which include infrastructure improvement,strengthening anti-terrorism measures that ensure safety for services inflows such as travel services.However,this study suggests that EAC partner states should establish more deepened regional arrangements related to trade in services so that to increase trade in services flows as well as services sector development.Furthermore,the regional governments should continue to establish strong institution frameworks to reduce trade cost hence development of trade in services.This study suggests that future studies on the determinants of trade in services in EAC countries should considered other variables that have not included in this study such as restrictive index,exchange rate,domestic regulations,tariff rate,taxes,resource endowments,and investment returns to broaden understanding on the determinants behind trade in services flows in the regional.