Will Institutional Reform Enhance Bilateral Trade Flows? Analyses from Different Reform Aspects
36 Pages Posted: 2 Oct 2010
Date Written: September 30, 2010
Abstract
This paper examines the effect of various types of institutional reforms in enhancing bilateral trade flows. We examine three types of institutional reforms' democratic political system, legal, and administrative reforms, and distinguish an initial effect from a permanent effect on bilateral trade for each reform type. Using a panel of 62 countries over 1980-2008, we find that all three types of reforms are important in enhancing bilateral trade flows, but their positive effects are only observed when the reforms are permanent. During the first year of reforms trade flows may decline due to the uncertainty of the success of those reforms. Our study concludes that permanent improvement in domestic institutions should be an important way for policy makers to pursue in promoting trade, in addition to other existing options such as forming regional trade arrangements.
Keywords: Institutional reform, bilateral trade flows, gravity model, panel-data fixed-effects models
JEL Classification: F10, F41, H10
Suggested Citation: Suggested Citation
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