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Institutions and Trade: Competitors or Complements in Economic Development?

  • Sambit Bhattacharyya
  • Steve Dowrick
  • Jane Golley

A recent paper by Dowrick and Golley (2004) finds that the impact of trade on growth varies with income. In particular, during the period 1980-2000, trade is observed to yield larger benefits for the more advanced economies. This result is backed up by Dejong and Ripoll (2005) who show that the richer countries benefit more from tariff reduction than the poorer countries. These findings raise the question, what is it about high levels of per capita income that enable richer economies to take better advantage of trade? It appears that the reason behind the success of the high income economies is the high quality institutions. These institutions not only boost growth directly but they impact economic performance indirectly by improving trade. We capture the complementarity between institutions and trade by estimating an empirical growth model which includes an interactive term involving these two variables. Better quality institutions are indicative of lower transaction costs which facilitates trade. It also ensures better distribution of the gains from trade paving the way for further trade and growth.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_005.

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Length: 23 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:deg:conpap:c012_005
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  1. Francesco Giavazzi & Guido Tabellini, 2004. "Economic and Political Liberalizations," Levine's Bibliography 122247000000000724, UCLA Department of Economics.
  2. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
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  4. Steve Dowrick & Jane Golley, 2004. "Trade Openness and Growth: Who Benefits?," Oxford Review of Economic Policy, Oxford University Press, vol. 20(1), pages 38-56, Spring.
  5. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2002. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development," NBER Working Papers 9305, National Bureau of Economic Research, Inc.
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