Working Paper: CEPR ID: DP10876
Authors: Inmaculada C. Álvarez; Javier Barbero; Andrés Rodríguez-Pose; José L. Zofo
Abstract: 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.
Keywords: gravity equation; institutional quality; international trade; public policy
JEL Codes: D02; F10; K4; Z14; Z18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional quality over time (L15) | influence of institutional quality on trade (F10) |
| better institutional quality in the importing country (L15) | bilateral trade flows (F10) |
| institutional quality indicators (I24) | bilateral trade flows (F10) |
| institutional distance between exporting and importing countries (F10) | bilateral trade flows (F10) |