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Institutional Quality and the Gains from Trade

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  • Axel Borrmann
  • Matthias Busse
  • Silke Neuhaus

Abstract

While theoretical models suggest that trade is likely to increase productivity and income levels, the empirical evidence is rather mixed. For some countries, trade has a strong impact on growth, whereas for other countries there is no or even a negative linkage. We examine one likely prerequisite for a welfare increasing impact of trade, that is, the role of institutional quality. Using several model specifications, including an instrumental variable approach, we identify those aspects of institutional quality that matter most for the positive linkage between trade and growth. We find that, above all, labour market regulation is the key to reducing trade-related adjustment costs. Market entry regulations, the efficiency of the tax system, the rule of law and government effectiveness do play a role too. In essence, the results demonstrate that countries with low-quality institutions do not benefit from trade. Copyright 2006 Blackwell Publishing Ltd..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Kyklos.

Volume (Year): 59 (2006)
Issue (Month): 3 (08)
Pages: 345-368

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Handle: RePEc:bla:kyklos:v:59:y:2006:i:3:p:345-368

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Cited by:
  1. Jung Hur & Rasyad A. Parinduri & Yohanes E. Riyanto, 2007. "Cross-Border M&A Inflows and the Quality of Institutions : A Cross-Country Panel Data Analysis," Microeconomics Working Papers 21920, East Asian Bureau of Economic Research.
  2. Gries, Thomas & Kraft, Manfred & Meierrieks, Daniel, 2009. "Linkages Between Financial Deepening, Trade Openness, and Economic Development: Causality Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 37(12), pages 1849-1860, December.
  3. Jung Hur & Backhoon Song, 2007. "What Kinds of Countries Have More Free Trade Partner Countries? - Count Regression Analysis," Trade Working Papers 22002, East Asian Bureau of Economic Research.
  4. Juliane Brach, 2008. "Constraints to Economic Development and Growth in the Middle East and North Africa," GIGA Working Paper Series 85, GIGA German Institute of Global and Area Studies.
  5. Li, Kui-Wai, 2011. "The Optimal Level and Impact of Internal Factors on Growth," MPRA Paper 36419, University Library of Munich, Germany.
  6. Langbein, Laura & Knack, Stephen, 2008. "The worldwide governance indicators and tautology : causally related separable concepts, indicators of a common cause, or both ?," Policy Research Working Paper Series 4669, The World Bank.
  7. Horatiu A. Rus, 2012. "Environmental Depletion, Governance, and Conflict," Southern Economic Journal, Southern Economic Association, vol. 78(4), pages 1305-1332, April.
  8. Herzer, Dierk, 2009. "Cross-country heterogeneity and the trade-income relationship," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 13, Verein für Socialpolitik, Research Committee Development Economics.
  9. Yago, Milton & Morgan, Wyn, 2008. "The impact of policy reversal on economic performance in Sub-Saharan Africa," European Journal of Political Economy, Elsevier, vol. 24(1), pages 88-106, March.
  10. Manole, Vlad & Spatareanu, Mariana, 2010. "Trade openness and income -- A re-examination," Economics Letters, Elsevier, vol. 106(1), pages 1-3, January.
  11. Martínez-Zarzoso, Inmaculada & Doyle, Eleanor, 2007. "Trade, Productivity and Institutional Quality: Issues and Empirics," Proceedings of the German Development Economics Conference, Göttingen 2007 21, Verein für Socialpolitik, Research Committee Development Economics.
  12. Jana Votápková & Milan Žák, 2013. "Institutional Efficiency of Selected EU & OECD Countries Using Dea-Like Approach," Prague Economic Papers, University of Economics, Prague, vol. 2013(2), pages 206-223.
  13. Koopmann, Georg & Hoekstra, Ruth, 2010. "Aid for trade and the political economy of trade liberalization," HWWI Research Papers 2-22, Hamburg Institute of International Economics (HWWI).
  14. Königer, Jens & Busse, Matthias & Koopmann, Georg, 2010. "Premises of Aid for Trade," Proceedings of the German Development Economics Conference, Hannover 2010 13, Verein für Socialpolitik, Research Committee Development Economics.
  15. Horatiu Rus, 2010. "Corruption, Conflict and the Management of Natural Resources," Working Papers 1005, University of Waterloo, Department of Economics, revised May 2010.
  16. Christian Volpe Martincus & Andrés Gallo, 2009. "Institutions and Export Specialization: Just Direct Effects?," Kyklos, Wiley Blackwell, vol. 62(1), pages 129-149, 02.

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