Section Days abstract book 2010.indd - RUB Research School ...

INSTITUTIONAL QUALITY, EXPORT PERFORMANCE
AND ECONOMIC GROWTH
Elias Fanta
International Development Studies; Ruhr-Universität Bochum, 44780 Bochum, Germany
e-mail: elias.fanta@rub.de
There is consensus among scholars that openness and integration into the world economy is
essential to realize the potential gain from trade. International trade brings a substantial positive
change in the income growth of a trading country. There is extensive theoretical and empirical
literature supporting this argument. Given constant returns to scale, perfect competition and the
absence of distortions, traditional trade theory suggests that there are considerable welfare gains
from market integration through trade. Though the majority of empirical studies confirm the
notion that international trade brings about a substantial welfare gain, the findings are not always
robust. For the same degree of openness some countries are more likely to benefit from trade than
others. Redding and Venables (2002) indicate that during the last quarter century there have been
wide variations in countries’ export performance. As a case in point, East Asian countries real
export increased by more than 800% since the early 1970s, while the share of those of sub-
Saharan Africa increased just by 70%.
The dramatic increase in export of East Asian countries brings a spectacular economic
growth for the respective countries, while most of sub-Saharan Africa and Latin American have
been less able to harness the benefits of the openness of their countries (Borrmann et al, 2006).
The main question evolving around this welfare discrepancies would be what are the
prerequisites for a positive linkage between trade and growth and thus a successful trade
liberalization strategy? A number of policy prerequisites would help to harness the benefits of
trade. Countries that have better macroeconomic stability, well-functioning infrastructure and
competitive markets may trade more than countries where these conditions are not met.
In addition, to the above prerequisites, there are other important factors for a successful
dismantling of trade barriers. One of the requirements is having institutions of high quality. As,
Levchenko (2007) reveals an important feature of North-South trade is that it occurs between
strikingly dissimilar countries and one of an important source of dissimilarity is institutional
quality. The discrepancy in the quality of institutions might be one of the reasons for unequal
distribution of the benefits of trade between North and South.
The term institution is highly associated to the work of Douglass North. Institutions can
be defined as humanly devised constraints that shape human interactions (North, 1990 p. 3). It is
the rules of the game and enforcement mechanism in a society as defined by the prevailing
explicit and implicit behavioral norms and their ability to create appropriate incentive
mechanisms for desirable economic behavior.