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Does institutional quality matter for trade? Institutional conditions in a sectoral trade framework

Listed author(s):
  • Álvarez, Inmaculada C.
  • Barbero, Javier
  • Rodríguez-Pose, Andrés
  • Zofio, Jose L.

This article examines the extent to which national institutional conditions affect bilateral sectoral trade flows, as well as whether the conditioning role of institutions for trade has been waxing or waning with time. Based on a new trade theory foundation that allows us to model bilateral trade flows at sectoral level, we derive the associated gravity equation and analyse bilateral trade flows of 186 countries for the period 1996-2012, with a total of 125,703 observations. The results indicate that both the institutional conditions at destination and the institutional distance between the countries involved in trade are relevant factors in determining the overall volume and composition of bilateral trade. They also show, however, that their sway on trade flows is only a fraction of that of other more traditional determinants of trade, notably geographical distance, with the exception of trade in the service sector, where institutional quality is of paramount importance. Finally and contrary to expectations, the magnitude of institutional quality for trade has not waxed over the last few years. If anything, it has waned and the resource boom of the 2000s is to be blamed for this evolution.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10876.

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Date of creation: Oct 2015
Handle: RePEc:cpr:ceprdp:10876
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  1. Andrés Rodríguez‐Pose, 2012. "Trade and Regional Inequality," Economic Geography, Clark University, vol. 88(2), pages 109-136, April.
  2. Baier, Scott L. & Bergstrand, Jeffrey H., 2009. "Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation," Journal of International Economics, Elsevier, vol. 77(1), pages 77-85, February.
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  5. Andrés Rodríguez-Pose, 2013. "Do Institutions Matter for Regional Development?," Regional Studies, Taylor & Francis Journals, vol. 47(7), pages 1034-1047, July.
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  12. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Cultural Biases in Economic Exchange?," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1095-1131.
  13. Yu, Shu & Beugelsdijk, Sjoerd & de Haan, Jakob, 2015. "Trade, trust and the rule of law," European Journal of Political Economy, Elsevier, vol. 37(C), pages 102-115.
  14. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
  15. Barbero, Javier & Behrens, Kristian & Zofio, Jose L., 2015. "Industry location and wages: The role of market size and accessibility in trading networks," CEPR Discussion Papers 10411, C.E.P.R. Discussion Papers.
  16. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
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