A blessing or a curse? Causal link between primary exports and institutional quality

Countries that are rich in natural resources are those exporting mainly primary goods worldwide and that specialization in commodities might result in an incentive for certain groups to hinder a country’s institutional development. Hence, we investigate the causal effect of commodity exports on the institutional quality of 49 countries between 1997 and 2019. Since primary exports might, at the same time, cause and be impacted by institutional quality, it is crucial to search for exogenous natural variations in commodity exports in combination with econometric modeling strategies. For that, we use a natural experiment, China’s accession to the World Trade Organization, to deal with the endogeneity problem, and to identify the causal effect of primary trade on institutional quality free from bias. Our results indicate that as countries (developing and developed) focus on commodity based exporting goods, they cause a reduction in the effectiveness of their institutions. Our paper is helpful to policymakers aiming to improve a country’s level of institutional quality through trade specialization. A trade policy focused on a more diverse exporting agenda requires investment in technology, human capital, to name a few. Our results show that these investments could enjoy the benefits of stronger, more effective institutions.