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Institutional Quality, Trade, and the Changing Distribution of World Income

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Author Info
Brigitte Desroches
Michael Francis

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Abstract

Conventional wisdom holds that institutional changes and trade liberalization are two main sources of growth in per capita income around the world. However, recent research (e.g., Rigobon and Rodrik 2004) suggests that the Frankel and Romer (1999) trade and growth finding is not robust to the inclusion of institutional quality. In this paper, the authors argue that this "trade and growth puzzle" can be explained once institutional quality is acknowledged as a determinant of the willingness to save and invest, and hence acknowledged as a determinant of long-run comparative advantage. The paper consists of two parts. First, the authors develop a theoretical model which predicts that institutions determine a country's underlying comparative advantage: countries that have good institutions will tend to export relatively more capital-intensive (or sophisticated) goods compared with countries that have poor institutions; trade can magnify the effect of institutional quality on income, leading to greater income divergence than if countries remain in autarky. Second, using a panel of over eighty countries and twenty years of data, the authors find empirical support for their hypotheses.

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Paper provided by Bank of Canada in its series Working Papers with number 06-19.

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Length: 47 pages
Date of creation: 2006
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Handle: RePEc:bca:bocawp:06-19

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Related research
Keywords: International topics; Development economics;

Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F15 - International Economics - - Trade - - - Economic Integration
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
P48 - Economic Systems - - Other Economic Systems - - - Other Economic Systems: Political Economy; Legal Institutions; Property Rights

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