Gokhale Institute of Politics and Economics (GIPE), Pune (India)
Abstract
This study examines the “Linder theory” for bilateral trade of Iran. This theory is one of
the main theories of the international trade based on the demand side. The Linder
hypothesis implies that the more similar the demand structure of two countries is , the
more intensive is the potential trade between these two countries. In the post-Revolution
era, Iran’s trade direction and pattern have been changed. Presently, trade partners with
higher per capita income are replaced by countries with lower per capita income. During
the time period of this study 1992-2012, Iran has been considered as a developing
country. It appears that Iran is trading more with developing countries. To test the
validity of Linder theory, data related to 127 countries including Iran and its trading
partners for the period of 1992-2012 is included as cross-sections in three models, which
are fixed-random effects models, and two gravity models. Countries are divided into five
groups which are Base group (Including all countries), high-income, upper-middle
income, lower-middle income and low-income. In this study, Linder effects describe the
effect of dissimilarity of Per Capita GDP of Iran and its trading partners on bilateral
trade. Empirical estimations of this study suggest that there is a strong Linder effect for
bilateral trade, which implies that there is also the Linder effect for trade in developing
countries. Most of empirical studies have been testing Linder’s theory for developed
countries. Since there are few studies about the Linder effect in developing world, this
study also provides insight to prove Linder’s theory among developing countries.
However, the Linder effect is not the only factor that affected trade pattern and direction
of Iran. Political factors such as ideology of the Islamic Republic of Iran, international
sanctions imposed on the country, domestic political instability, and other factors such as
economics size of trading partners, distance among them as a proxy for transportation
cost, common borders, etc affected bilateral trade