Trade and harmonization: if your institutions are good, does it matter if they are different?

Trade and harmonization: if your institutions are good, does it matter if they are different?

Published Jan 2006

Authors

R. Islam, A. Reshef

Publisher

Focus themes

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Impact of institutional structure on trade performance

This research paper asks the question, how much does differences in institutional form or design matter for trade, once differences in overall is controlled for?

The research draws several conclusions, including the following:

  • institutional quality has a positive effect on bilateral trade, while differences in legal origin have a negative effect on trade.
  • the impact of bad institutions (inefficient bureaucracy, corruption and poor property rights protection) is a much larger deterrent to trade than the impact of differences in form as proxied by differences in legal systems.
  • a reasonable and achievable improvement in institutional quality can increase bilateral trade much more than harmonization of their legal systems
  • institutional quality explains 5-15 times more of the variation in bilateral trade flows, relative to differences in legal origins.

[adapted from authors]

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