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Productivity, Trade, and Institutional Quality: A Panel Analysis

  • Eleanor Doyle


    (Institute for Business Development and Competitiveness, Department of Economics, University College Cork, College Road, Cork, Ireland)

  • Inmaculada Martinez-Zarzoso


    (Department of Economics, Georg-August Universitat Gottingen, Platz der Gottinger Sieben 3, Gottingen 37073, Germany and Departamento de Economia and Instituto de Economia Internacional, Universidad Jaume I, 12080 Castellon, Spain)

Recognizing that gains historically attributed to trade capture instead the roles of institutions and geography, we estimate the relationship between labor productivity and trade for a panel of countries, 1980 to 2000. We use real and nominal openness as measures of trade. The endogeneity of trade and institutional quality is accounted for with instruments. Our trade instrument is based on a theoretically motivated gravity equation and uses a more comprehensive data set than in related studies. Fixed- and random-effects and system-GMM panel estimation methods address potential biases associated with cross-section estimations. We find a robust relationship between real openness and labor productivity from the 1990s. Countries that trade more generate higher levels of productivity, supporting an institutional theory of growth. We find evidence that countries with low-quality institutions benefit from openness to trade and that the positive effect of trade on labor productivity is lower for more populated countries.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 3 (January)
Pages: 726-752

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Handle: RePEc:sej:ancoec:v:77:3:y:2011:p:726-752
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