Comparative Advantages, Transaction Costs and Factor Content in Agricultural Trade: Empirical Evidence from the CEE

The present study examines factor content in the CEE transition country agricultural trade. However, deviating from the traditional approach, we do not test the HOV prediction. Instead, we examine the theoretical predictions that relate the factor content of international trade to cross-country differences in technology and endowments. Our empirical findings suggest that factor content between agricultural exports and imports is rather similar in CEE. In order to explain the general lack of the CEE agricultural specialisation and the observed paradox, we attempt to identify the role of transaction costs and market imperfections in determining factor content in agricultural production and trade. We find that technological differences and factor endowment are only weak determinants of country specialisation. Transaction costs and market imperfections distort farm specialisation and organisation in CEE, and hence factor content in traded agricultural goods.