The Extensive Margin of International Trade in a Transition Economy: The Case of Mongolia

Using the Kehoe and Ruhl (2009) methodology, we investigate whether the variety of traded goods, which is the extensive margin of trade, has actually changed in a transition economy, such as Mongolia, as predicted by recent theoretical models. We find large increases in the extensive margin of Mongoliafs trade with major trade partners such as Japan from 1997 to 2002, when Mongolia was undergoing significant structural reforms. We also find large increases in the extensive margin for the Mongolia-China and Mongolia-EU pairs after trade liberalizations due to Chinafs accession to the World Trade Organization (WTO) (2001) and Mongoliafs eligibility for the EU Generalized Systems of Preferences (GSP+) scheme (2005). We, however, find no increases in the extensive margin for the Mongolia-Russia pair during the period 2002 to 2007, when there was no major change in the trade regime of these two countries. For each episode, we evaluate whether the extensive margin growth in Mongolia, measured by the Kehoe and Ruhl methodology, was actually a consequence of the increases in the trade volumes of previously zero or little traded goods. We also show that across country pairs, mineral resources and resources coming from livestock herding contributed most to the increased extensive margin of Mongoliafs exports. Our robustness checks indicate that methodologies other than that of Kehoe and Ruhlfs overstate the extensive margin growth in Mongolia with small trade relationships, while they understate in developed countries with large trade relationships as documented by Kehoe and Ruhl.