Why Don’t MENA Countries Trade More? The Curse of Deficient Institutions

This paper explores the relation between institutions and trade in the Middle East and North Africa (MENA) region. Although most of the countries suffer from a clear deficit of “good” institutions, the MENA region was neglected in the literature on institutions and trade. This literature offers a broad consensus that poor institutions hamper trade, and that trade liberalization engenders institutional reforms. Taking into account the inverse relation between institutions and trade, we use a gravity model that explains bilateral trade for disaggregated goods and service sectors for 21 MENA countries over the period 1995-2014. Our results show that, in the presence of excessive zero trade observations, the institutional gap between MENA countries and their trading partners are considered as fixed export costs that help explain the zero probability of trade for some MENA countries. Indeed, we find that the institutional gap between trading partners has a significant negative effect on trade, and not the level of the exporter and importer’s institutional quality. Our results are robust after we control for the endogeneity problem between institutions and trade. Also, alternative aspects of institutions have different effects on trade in goods and trade in services.