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Trade, Productivity and Institutional Quality: Issues and Empirics

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  • Martínez-Zarzoso, Inmaculada
  • Doyle, Eleanor

Abstract

We estimate the relationship between productivity and trade for a panel of countries over the period 1980 to 2000 using instrumental-variables estimation of a productivity equation. We note that some estimates of productivity gains attributed to trade capture instead the roles of institutions and geography. The endogeneity of trade and institutional quality is accounted for by using instruments. We extend the Frankel and Romer (1999) specification, using real openness to measure trade (following Alcala and Ciccone, 2004), which allows for identification of channels through which trade and production scale affect productivity. The trade instrument is based on a ?theoretically motivated? gravity equation. The instruments for institutional quality come from Gwartney, Holcombe and Lawson (2004). Contrary to Alcala and Ciccone, our results suggest no robust relationship between real openness and labour productivity in the 1980s. Conversely, the relationship between productivity and real openness appears to be robust from 1990 onwards and similarly in the case of institutional quality. We also find evidence implying that countries with low-quality institutions are also able to benefit from openness to trade. --

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Göttingen 2007 with number 21.

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Date of creation: 2007
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Handle: RePEc:zbw:gdec07:6544

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  2. Lewis, Arthur, 1979. "The Slowing Down of the Engine of Growth," Nobel Prize in Economics documents, Nobel Prize Committee 1979-2, Nobel Prize Committee.
  3. Francisco Alcalá & Antonio Ciccone, 2001. "Trade and productivity," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 580, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2002.
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  7. Borrmann, Axel & Busse, Matthias & Neuhaus, Silke, 2006. "Institutional Quality and the Gains From Trade," HWWA Discussion Papers, Hamburg Institute of International Economics (HWWA) 341, Hamburg Institute of International Economics (HWWA).
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  9. Kunst, Robert M & Marin, Dalia, 1989. "On Exports and Productivity: A Causal Analysis," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 699-703, November.
  10. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 379-399, June.
  11. Connolly, Michelle, 2003. "The dual nature of trade: measuring its impact on imitation and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 72(1), pages 31-55, October.
  12. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 584.
  13. James D. Gwartney & Randall G. Holcombe & Robert A. Lawson, 2004. "Economic Freedom, Institutional Quality,and Cross-Country Differences in Income and Growth," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 24(3), pages 205-233, Fall.
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