Australia’s Export Potential: An Exploratory Analysis

Abstract

A country’s inability to export to its potential is a reflection of institutional and structural impediments and rigidities that exist at home as well as in its trading partners. Distinguishing the rigidities that exist in home and trading partner countries as ‘behind the border’ factors and ‘beyond the border’ factors, respectively, this paper examines the impact of ‘behind the border’ factors on the home country’s export potential.

This can be done by choosing either a developing country or a developed country. It is generally assumed that the ‘behind the border’ factors exert more negative effects on export potential in developing countries than in developed countries due to the former’s institutional, infrastructural and policy weaknesses. As this is an empirical question, we test the hypothesis that the ‘behind the border’ factors would exert insignificant negative effects on export potential of developed countries by influencing them to achieve their export potential fully. Australia, which is relatively open among the resource-based developed economies, is chosen for testing the hypothesis by estimating a stochastic frontier gravity model using bilateral data from 2006 to 2008 on trade with its key trading partners. The empirical analysis indicates that even in the case of Australia, ‘behind the border’ factors are important in explaining the reasons for its failure to export to its full potential.

Keywords: Australia, Exports potential, stochastic frontier, gravity model

JEL Classification: FI, F4