Impact of Regime Changes in Afghanistan on Pakistan’s Trade: A Gravity Estimation

This study explores how regime changes in Afghanistan on Pakistan's trade between 1980 and 2021. It utilizes panel data covering annual exports, imports for Pakistan and its 248 trading partners, including Afghanistan. Employing gravity estimation techniques like OLS and PPML, the research focuses on estimating bilateral trade between Pakistan and Afghanistan, with regime transitions in Afghanistan as the primary variable of interest. The results from OLS estimation highlight significant insights, particularly in models 1, 2, and 3, where key independent variables such as Russian reinvasion, rebellion, Taliban era, Karzai era, and Ghani era have treated as dummy variables. Notably, the coefficient for Russian reinvasion consistently shows positive and significant effects across all models, indicating increases in exports, imports, and trade associated with rises in Russian reinvasion. Similarly, positive coefficients have observed for the Taliban era and the Karzai era, suggesting varying increases in trade volumes during these periods. Conversely, the Ghani era coefficient demonstrates negative effects on exports, imports, and trade, implying a decline in trade volumes during this period. Furthermore, factors like GDP, distance, contiguity, official language, ethno-linguistic ties, and colonial history emerge as significant determinants of bilateral trade flows, with higher GDP and proximity positively impacting trade while greater distance and linguistic differences exert negative effects. The robustness test using the PPML method confirms the significance of these factors, emphasizing the crucial role of stable political environments in fostering robust trade relations. With strong model fits and consistent findings with previous research, this study provides valuable insights into the complexities of international trade dynamics and highlights the importance of political stability in promoting trade.