is heterosckedastic. Robustness of the OLS estimated standard error of the coefficients is examined by using heterosckedasticity-robust variance. The second column of Table 6 reports the Huber/White sandwich estimator of variance which is used without specifying a cluster (group) of the sample (see White (1980) for the procedure). In the third and fourth column a cluster is formed with respect to importer and exporter, respectively. As an alternative approach, we performed weighted least squares (WLS) by correcting the error term for heterosckedasticity by using the estimated variance for importer (the fifth column) or exporter (the sixth column). These results are compared with the main result displayed in the first column. Standard error are acceptably robust across those specifications. The significance of the key variables generally remain. The WLS coefficients are also similar to the OLS ones while a few coefficients turn insignificant.

# **5.  Potential Benefits from Trade Facilitation: Simulation Results**

# **5.1 Simulation Design and Aggregate Results**

The gravity model approach allows us to consider how much trade among the 75 countries might be increased under various scenarios of improved trade facilitation and/or tariff reduction. We will examine scenarios that focus on improved port efficiency, improved customs environment, improved service sector infrastructure, and regulatory environment. Our objective in the simulations is to help inform policymakers on which specific trade facilitation initiatives might have the greatest potential to increase trade and economic well-being.

We follow the simulation strategy presented in WMO, which uses a formula to design a unique program of reform for each country in the sample. The formula brings the _below-average_ countries in the group _half-way_ to the average for the entire set of countries. We focus on the _below-average_ country on the grounds that donor attention and capacity building efforts should be extended to this group. It is not that the country with the best practice should not try to do better; it is just that limited multilateral resources are not best utilized that way.

We choose an improvement of _half-way_ to the average because there are limited development resources and improvements take time. Dramatic improvements are possible, but it is not realistic to presume a scenario whereby all countries in the sample are assumed to achieve best practice as measured by the nation with the highest score on a particular measure of trade facilitation.<sup>10</sup> Since each economy has a specific value for each trade facilitation indicator, each country that is below-average on that indicator will improve by a different amount so as to get half-way to average. Our simulation approach acknowledges the differential potential for improvement revealed by Table 1. This approach contrasts with the here-to-fore standard approach to simulation design where all

> 10 Moreover, it is the case that in the course of the simulation, the ‘average’ target will rise, and we do not take account of this endogeneity.  By restricting the improvement to half-way to average, we limit to some degree these second round effects.

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