Estimating export potential for a small open economy using a gravity model approach: evidence from Namibia*

Exports are the drivers of economic growth in Namibia. Given their importance in the economy, it is necessary to analyse factors that are determining export flows between Namibia and its trading partners. A gravity model is very important in the analysis of bilateral trade flows, and has proven to be a useful tool in determining trade or export potential of a country. The purpose of this study is to investigate factors that determine exports of Namibia using a gravity model approach. Panel data econometric technique was used to estimate the gravity model for Namibia. The analysis covers the period 1998–2012 and uses annual data. Pooled effects, fixed effects and random effects models were estimated. The LM and F-test statistics were used to test for poolability of the cross-sections. Poolability was rejected in favour of heterogeneity among the cross-sections. Haussman test was used to determine whether fixed or random effects is the appropriate model. The results showed that fixed effect is the appropriate model. The analysis indicates that increases in importer’s GDP and Namibia’s GDP cause exports to increase, while distance and importer’s GDP per capita are associated with a decrease in exports. Namibia’s GDP per capita and real exchange rates do not have an impact on export. Namibia exports more to countries where it shares a common border and SADC as well as to the European Union. The study shows that there is unexploited export potential to among others, Australia, Belgium, Kenya, Mauritius, Netherlands, Portugal, South Africa and Switzerland. These results are important for trade policy formulation in order ensure that Namibia’s export potential is exploited in order to enhance economic growth and generates employment. Trade promotion activities should be directed to that have unexploited potential.