Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework
29 Pages Posted: 13 Oct 2015
Date Written: October 2015
This article examines the extent to which national institutional conditions affect bilateral sectoral trade flows, as well as whether the conditioning role of institutions for trade has been waxing or waning with time. Based on a new trade theory foundation that allows us to model bilateral trade flows at sectoral level, we derive the associated gravity equation and analyse bilateral trade flows of 186 countries for the period 1996-2012, with a total of 125,703 observations. The results indicate that both the institutional conditions at destination and the institutional distance between the countries involved in trade are relevant factors in determining the overall volume and composition of bilateral trade. They also show, however, that their sway on trade flows is only a fraction of that of other more traditional determinants of trade, notably geographical distance, with the exception of trade in the service sector, where institutional quality is of paramount importance. Finally and contrary to expectations, the magnitude of institutional quality for trade has not waxed over the last few years. If anything, it has waned and the resource boom of the 2000s is to be blamed for this evolution.
Keywords: gravity equation, institutional quality, international trade, public policy
JEL Classification: D02, F10, K4, Z14, Z18
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