Productivity, Trade, and Institutional Quality: A Panel Analysis

Abstract

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.

Institutional quality as a barrier to trade

“…Similar to the works of Borrmann et al (2006), Dollar and Kraay (2003), Levchenko (2007Levchenko ( , 2011, Ma et al (2010), and Doyle and Martinez-Zarzoso (2011), this article utilizes the World Bank's Worldwide Governance Indicators (WGI) to capture six broad categories of institutional quality: (1) Voice and Accountability, (2) Political Stability and the Absence of Violence and Terrorism, (3) Government Effectiveness, (4) Regulatory Quality, (5) Rule of Law and (6) Control of Corruption. Each WGI index ranges from -2.5 (weak governance) to 2.5 (strong governance), as reflected by the global perceptions of government and nongovernment agencies and private businesses.…”

Does Corruption Hinder Trade for the New EU Members?

“…The second indirect influence that the business environment has on trade is via productivity, with low levels of output per worker being associated with low quality institutions (Hall andJones 1999 andDoyle andMartinez-Zarzoso 2011). Along with the exchange rate and unit labour costs, labour productivity is one of the determinants of competitiveness.…”

Trade Openness and Income: A Tale of Two Regions

“…As a result of the above criticisms, in a second wave of empirical studies it became state of the art to estimate the openness‐growth nexus working with panel data (Harrison, ). Most studies have used fixed effects (within estimation) to capture time‐invariant country characteristics and to control for the time‐invariant part of unobserved heterogeneity (Wang et al., ; Felbermayr, ; Doyle and Martínez‐Zarzoso, ). Endogeneity was taken care of by instrumenting for trade openness through geographic and historical variables (distance between trading partners, distance to the equator, colonial history and settler mortality).…”

“…For the Asian case, using the system GMM approach, Das and Paul () obtained a positive and significant link between openness and growth. Rodriguez () claims that when one introduces several measures of geography in the regression, the coefficient on trade becomes statistically insignificant, while others, like Harrison (), Winters () or Doyle and Martínez‐Zarzoso (), reach more optimistic conclusions. In particular, the latter authors’ results suggest a robust positive relationship between real openness and labour productivity from the 1990s onwards…”

“…First of all, the issue whether trade openness promotes development in terms of income generation has not been settled yet in empirical studies, specially taking into account the possible non‐stationary nature of the variables involved in this relationship in a time dimension. Second, the use of real trade openness as an outcome variable (instead of trade policy measures which are extremely difficult to be observed over longer periods of time) might still allow us to gain important insights as to the impact of trade on GDP per worker (Alcalá and Ciccone, ; Doyle and Martínez‐Zarzoso, ).…”