Institutions and Trade: Competitors or Complements in

Economic Development?

Sambit Bhattacharyya, Steve Dowrick and Jane Golley

Paper prepared for EDGES Workshop, Tuesday 15 November 2005, ANU

OUTLINE• Institutions rule?

– Acemoglu, Johnson & Robinson (2001)– Rodrik, Subramanian, Trebbi (2004) – Sachs (2003)– Glaeser, La Porta, Lopez-de-Silanes and Shleifer (2004)

• Growth versus levels analysis

• Growth: Interacting trade and institutions

• Conclusion: complementarities between

institutions and trade.

Rodrik’s Competition

6.1 * * * (1.85) * * (1.48)t

i i i iy = 0.69Rule +0.32Lat +0.16Trade

y is log real GDP per capita, 1995

Rule is Rule of Law Index, 2001, from KKZ

Lat is absolute latitude / 90

Trade is log of (X+M)/GDP averaged 1950-98

Growth or Levels ?

0 0ˆ (2)i iT i i iT iy y y y e X

(1 ) (3)iT it iT iy y e X

(1)iT iT iy X

Growth or Levels?

Problems with the Levels approach

– Prediction and policy

– Ignores process of development

– Mis-specified: omitted variable problem

– Instrumental variables do not uniquely identify Institutions (e.g. Glaeser)

Dependent Variable: Log per capita Income, 2000OLS

n=1112SLS

65OLS

89

2SLS

53

OLS

109

2SLS

33

ln(Y)1980 / 1900

Rule of Law

Schooling

Log Trade Share

Latitude

Exogeneity(p value)

0.80***(0.092)

-0.003(0.119)

0.013**(0.005)

0.000

0.501***(0.171)

0.278** (0.138)

-0.115(0.167)

0.012*(0.0072)

0.508

0.329***(0.0257)

0.078(0.156)

0.012**(0.0058)

0.852***(0.046)

0.258***(0.059)

-0.013(0.055)

0.003(0.0026)

0.136

0.27***(0.092)

0.067(0.093)

0.017***(0.004)

0.019

1.45***(0.238)

-0.487(0.276)

-0.01(0.013)

Interactions

• Acemoglu, Johnson and Robinson (AJR), AER July 2005 “The rise of Europe: Atlantic Trade, Institutional Change and Economic Growth”

• Key Argument: From 1500, trade-induced institutional change promotes economic growth in Western European countries with ‘non-absolutist’ institutions

Interactions

• Dowrick and Golley (2004) – During 1980-2000 richer countries benefit more from high trade shares

• DeJong and Ripoll (2005) – Richer countries benefit more from tariff reductions

• i.e. Benefits of trade ‘openness’ increasing with per capita income

• Baseline OLS Regression

• Plus an Interaction Term

11 2 0 3

0

4 5 0 6

100*ln( ) / 20 ln

+ ln

yy INS

y

TR YS LAT

7 0 7 0

7 0

ln *ln ln *

ln *

TR y or TR INS

or TR YS

Table 2. Summary Statistics

Variablen Mean

Standard Deviation

Minimum Maximum

Growth of real GDP per capita (% p.a. 1980-2000)

117 1.21 1.85 -3.34 5.89

Initial income ($1996 at PPP)

123 5,795 5,448 547 21,677

Initial Years of Schooling (years)

95 4.6 2.8 0.4 11.9

Latitude (absolute value) 123 22.8 16.2 0.23 63.9

Log Trade Share (%)(period average)

120 4.2 0.6 2.9 5.9

Institutional Variables (period averages) (INS)

Investment Profile (IP) 99 6.5 1.3 3 9.6

Law and Order (LO) 99 3.6 1.4 1.0 6

Corruption (CO) 98 3.4 1.3 0.3 6

Democratic Accountability (DA)

99 3.8 1.3 1.1 6

Table 4. Trade, Investment Profile, Human Capital and Growth

Dependent variable: Growth 1980-2000 (% per year)

Model (1)obs=81

Model (2)obs=81

Model (3)obs= 81

Log Initial Income

Investment Profile

Log Trade Share (LTS)

Latitude

Initial Years Schooling

Interactive Terms

LTS * Income

LTS * Investment Profile

LTS * Schooling

R2

-4.11*** (1.18)

0.48** (0.28)

-7.33*** (2.74)

0.027*** (0.014)

0.13* (0.097)

0.84*** (0.316)

0.3009

-0.95*** (0.38)

0.16 (0.32)

-0.57** (0.37)

0.031*** (0.014)

0.14* (0.098)

0.071** (0.040)

0.2810

-0.93*** (0.38)

0.50** (0.28)

-1.07** (0.61)

0.032** (0.014)

-0.56* (0.413)

0.176** (0.101)

0.2661

Table 5. Interactions with each of the institutional variables

Institutional Variable

Investment Profile

Democratic Account-ability

Law and

Order

Corruption

Log Trade Share * Initial Income (Model 1)

Log Trade Share * Initial Institutions (Model 2)

Log Trade Share* Initial Schooling (Model 3)

0.836***(0.316)

0.071**(0.040)

0.176**(0.101)

0.801***(0.299)

0.143**(0.085)

0.134(0.101)

0.809***(0.305)

-0.067(0.085)

0.174**(0.105)

0.869***(0.315)

0.109(0.104)

0.144(0.104)

Key Results

• Benefits of trade higher for countries with

- higher Investment Profiles and

- higher Democratic Accountability

• Not so for Law & Order or Corruption

• Modern equivalent of AJR story?

Concluding Comments

• Levels versus growth

• Institutions don’t rule

• Interactions of certain ‘institutional’

variables with trade important

• Policy implications