Does trade openness improve the quality of domestic institutions? Evidence from Africa
Abstract
Research background: The research article deals with impacts of international trade openness on institutions in less developed economies, namely in Africa.
Purpose of the article: It investigates the impacts of international trade openness on institutional quality in Africa measured by twelve various variables.
Methods: It applies generalized methods of moments to a dynamic panel data of 34 African countries in the period of 1988?2012. Institutional quality data come from International Country Risk Guide, the rest from World Development Indicators and UNESCO databases.
Findings & value added: Our results indicate that in the case of Africa, trade openness seems to be a positive and significant determinant of institutional quality, however, it differs across various institutional variables. Trade openness brings a positive impact on government stability, bureaucracy and law and order, we also identify its conflict-mitigating effects. This happens, unfortunately, with an exemption for natural resources exports. Trade openness also positively influences security and socioeconomic conditions, although we find the link much weaker. Regarding our control variables, we find two interesting results. First, GDP per capita has a strong and positive association with institutional quality when measured by one bundled indicator, however, individual variables show different intensities. Second, we find a strong and positive association of net foreign direct investment inflows and government stability. The added value of this research lies not only in focus on the less researched relationship, i.e., how trade impacts the institutional quality, but dominantly in focus on many institutional variables at once and comparison of their effects. Other empirical studies usually focus on selected variables only, or on selected trade items (natural resources).
Keywords
international trade, trade openness, quality of institutions, Arica, panel data models, socio-economic development
References
- Acemoglu, D., & Robinson, J. (2006). Economic backwardness in political perspec-tive. American Political Science Review, 100(1), 115?131. doi: 10.1017/S0 003055406062046. DOI: https://doi.org/10.1017/S0003055406062046
View in Google Scholar - Adams, S., & Opoku, E. E. O. (2015). Foreign direct investment, regulations, and growth in Sub-Saharan Africa. Economic Analysis and Policy, 47(C), 48?56. doi: 10.1016/j.eap.2015.07.001. DOI: https://doi.org/10.1016/j.eap.2015.07.001
View in Google Scholar - Alonso, J. A., & Garcimartín, C. (2013). The determinant of institutional quality. More on the debate. Journal of International Development, 25, 206?226. doi: 10.1002/jid.1710. DOI: https://doi.org/10.1002/jid.1710
View in Google Scholar - Álvárez, I. C., Barbero, J., Rodríguez-Pose, A., & Zofío, J. (2018) Does institutional quality matter for trade? Institutional conditions in a sectoral trade framework. World Development, 103, 72?87. doi: 10.1016/j.worlddev.2017.10 .010 DOI: https://doi.org/10.1016/j.worlddev.2017.10.010
View in Google Scholar - Anderson, J. E., & Marcoullier, M. (2002). Insecurity and the pattern of trade: an empirical investigation. Review of Economics and Statistics, 84(2), 342?352. doi: 10.1162/003465302317411587. DOI: https://doi.org/10.1162/003465302317411587
View in Google Scholar - Anderson, J. E. (2008). Does trade foster contract enforcement? Economic Theory, 41(1), 105?130. doi: 10.1007/s00199-008-0378-0. DOI: https://doi.org/10.1007/s00199-008-0378-0
View in Google Scholar - Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277?297. doi: 10.2307/2297968. DOI: https://doi.org/10.2307/2297968
View in Google Scholar - Arshavskiy, A. (2019). Institutions and comparative advantage in services trade. Leibnitz Information Centre for Economics. Retrieved from: http://hdl.handle. net/11159/4031.
View in Google Scholar - Asongu, S. A., & Nwachukwu, J. C. (2016). Foreign aid and governance in Africa. International Review of Applied Economics, 30(1), 69?88. doi: 10.1080/0269 2171.2015.1074164. DOI: https://doi.org/10.1080/02692171.2015.1074164
View in Google Scholar - Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, economic freedom and growth: new evidence from Latin America. European Journal of Political Economy, 19, 529?545. doi: 10.1016/S0176-2680(03)00011-9. DOI: https://doi.org/10.1016/S0176-2680(03)00011-9
View in Google Scholar - Berman, H. (1983). Law and revolution: the formation of the Western legal tradi-tion. Cambridge: Harvard University Press.
View in Google Scholar - Berman, N., & Couttenier, M. (2014). External shocks, internal shots: the geogra-phy of civil conflicts. CEPR Discussion Paper, 9895.
View in Google Scholar - Bah, M., Ondoa, H., & Kpognon, K. D. (2021). Effects of governance on exports in Sub-Saharan Africa. International Economics, 167, 1?14. doi: 10.1016/j.inteco. 2021.05.003. DOI: https://doi.org/10.1016/j.inteco.2021.05.003
View in Google Scholar - Bhagwati, J., & Srinivasan, T. N. (2002). Trade and poverty in the poor countries. American Economic Review, 92(2), 80?183. doi: 10.1257/000282802320189 212. DOI: https://doi.org/10.1257/000282802320189212
View in Google Scholar - Bhattacharya, P., & Thomakos, D. (2007). Trade, openness, and domestic con-flict: an empirical investigation for Latin America. Economics of Peace and Security Journal, 2(2), 77?80. doi: 10.15355/epsj.2.2.77. DOI: https://doi.org/10.15355/epsj.2.2.77
View in Google Scholar - Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dy-namic panel data models. Journal of Econometrics, 87(1), 115?143. doi: 10.101 6/S0304-4076(98)00009-8. DOI: https://doi.org/10.1016/S0304-4076(98)00009-8
View in Google Scholar - Bond, S., Hoeffler, A., & Tample, J. (2001). GMM estimation of empirical growth models. Oxford: University of Oxford.
View in Google Scholar - Borrmann, A., Busse, M., & Neuhaus, S. (2006). Institutional quality and gains from trade. Kyklos, 59(3), 345?368. doi: 10.2139/ssrn.895242. DOI: https://doi.org/10.1111/j.1467-6435.2006.00336.x
View in Google Scholar - Boxell, L., Dalton, J., & Leung, T. (2019). Slave trade and conflict in Africa 1400-2000. MPRA Paper, 94468. DOI: https://doi.org/10.2139/ssrn.3403796
View in Google Scholar - Cali, M. (2015). Trading away from conflict, using trade to increase resilience in fragile states. Washington: The World Bank. DOI: https://doi.org/10.1596/978-1-4648-0308-6
View in Google Scholar - Candau, F., & Gbandi, T. (2019). Trade and institutions: explaining urban giants. Journal of Institutional Economics, 15(6), 1017?1035. doi: 10.1017/S1744137 419000328. DOI: https://doi.org/10.1017/S1744137419000328
View in Google Scholar - Castilho, M., Menéndez, M. & Sztulman, A. (2012). Trade liberalisation, inequality and poverty in Brazilian states. World Development, 40(4), 821?835. doi: 10.1016/j.worlddev.2011.09.018. DOI: https://doi.org/10.1016/j.worlddev.2011.09.018
View in Google Scholar - Chan, K. S. (2002). Trade and bureaucratic efficiency. Economic Development and Cultural Change, 50(3), 735?754. doi: 10.1086/342248. DOI: https://doi.org/10.1086/342248
View in Google Scholar - Chong, A. (2001). Law tradition and institutional quality: some empirical evi-dence. Journal of International Development, 12(8), 1057?1068. doi: 10.1002/jid.681. DOI: https://doi.org/10.1002/jid.681
View in Google Scholar - De Groot, H., Linders, G.-J., & Rietveld, P. (2003). The institutional determinants of bilateral trade patterns. Tinbergen Institute Working Paper, 03-044/3. DOI: https://doi.org/10.2139/ssrn.417323
View in Google Scholar - Dutt, P. (2009). Trade protection and bureaucratic corruption: an empirical inves-tigation. Canadian Journal of Economics/Revue Canadienne d`Economique, 42(1), 155?183. doi: 10.1111/j.1540-5982.2008.01503.x. DOI: https://doi.org/10.1111/j.1540-5982.2008.01503.x
View in Google Scholar - Epo, B. N., & Faha, D. R. N. (2020). Natural resources, institutional quality, and economic growth: an African tale. European Journal of Development Re-search, 32(1), 99?128. doi: 10.1057/s41287-019-00222-6. DOI: https://doi.org/10.1057/s41287-019-00222-6
View in Google Scholar - Fauzel, S. (2020). Investigating the impact of trade on poverty reduction in a small island economy. Forum for Social Economics, 51(4), 433?452. doi: 10.1080/0 7360932.2020.1811746. DOI: https://doi.org/10.1080/07360932.2020.1811746
View in Google Scholar - Feeny, S., Iamsiraroj, S., & McGillivray, M. (2014). Growth and foreign direct in-vestment in the Pacific Island countries. Economic Modelling, 37, 332?339. doi: 10.1016/j.econmod.2013.11.018. DOI: https://doi.org/10.1016/j.econmod.2013.11.018
View in Google Scholar - Frensch, R., Horvath, R., & Huber, S. (2021). Openness effects on the rule of law: size and patterns of trade. International Review of Law and Economics, 68, 106027. doi: 10.1016/j.irle.2021.106027. DOI: https://doi.org/10.1016/j.irle.2021.106027
View in Google Scholar - Gani, A. (2007). Governance and foreign direct investment links: evidence from panel data estimations. Applied Economics Letters, 14(10), 753?756. doi: 10.10 80/13504850600592598. DOI: https://doi.org/10.1080/13504850600592598
View in Google Scholar - Garfinkel, M. F., Skaperdas, S., & Syropoulos, C. (2008). Globalisation and domes-tic conflict. Journal of International Economics, 76(2), 296?308. doi: 10.1016/j.jinteco.2008.07.005. DOI: https://doi.org/10.1016/j.jinteco.2008.07.005
View in Google Scholar - Gatti, R. (2004). Explaining corruption: are open countries less corrupt? Journal of International Development, 16(6), 851?861. doi: 10.1002/jid.1115. DOI: https://doi.org/10.1002/jid.1115
View in Google Scholar - Gori, O. D, Kun F., & Wilfred, D. (2018). Institutional quality and economic devel-opment in Sub-Saharan Africa: can management effort and bribes compen-sate for low-quality institutions? Journal of Economic Issues, 52(2), 473?482. doi: 10.1080/00213624.2018.1469920. DOI: https://doi.org/10.1080/00213624.2018.1469920
View in Google Scholar - Gui-Diby, S. L. (2014). Impact of foreign direct investment on economic growth in Africa: evidence from three decades of panel data analyses. Research in Economics, 68(3), 248?256. doi: 10.1016/j.rie.2014.04.003. DOI: https://doi.org/10.1016/j.rie.2014.04.003
View in Google Scholar - Hochman, G., Tabakis, C., & Zilberman, D. (2013). The impact of international trade on institutions and infrastructure. Journal of Comparative Economics, 41(1), 126?140. doi: 10.1016/j.jce.2012.07.001. DOI: https://doi.org/10.1016/j.jce.2012.07.001
View in Google Scholar - ICRG (2020). Country data. The PRS Group. Retrieved from https://www.prsgr oup.com/explore-our-products/icrg/.
View in Google Scholar - ICRG (2022). The ICRG methodology. The PRS Group. Retrieved from https://www.prsgroup.com/wp-content/uploads/2022/04/ICRG-Method.pdf.
View in Google Scholar - Iheonu, Ch. I., & Chigozie, G. O. (2017). Institutional quality and economic per-formance in West Africa. MRPA Paper, 82212.
View in Google Scholar - Inikori, J. E. (2002). African and the industrial revolution in England: a study in international trade and economic development. Cambridge: Cambridge Uni-versity Press. DOI: https://doi.org/10.1017/CBO9780511583940
View in Google Scholar - Islam, R., & Montenegro (2002). World development report: building institutions for markets. Washington: The World Bank.
View in Google Scholar - Islam, R., & Montenegro, C. (2002). What determines the quality of institutions? Background paper for World Development Report 2002. Washington: World Bank. DOI: https://doi.org/10.1596/1813-9450-2764
View in Google Scholar - Kamel, A. (2016). Trade and peace: the EU and Gaddafi?s final decade. International Affairs, 92, 683?702. doi: 10.1111/1468-2346.12602. DOI: https://doi.org/10.1111/1468-2346.12602
View in Google Scholar - Kim, S., & Park, S. Ch. (2020). Institutional quality, trade costs and comparative advantage. Korea Institute for International Economic Policy Working Paper, 19-06. DOI: https://doi.org/10.2139/ssrn.3700740
View in Google Scholar - Kopperschmidt, A., & Jacint, M. (1997). Assessment of trade liberalization in Sub-Saharan Africa. Intereconomics, 32(4), 193?202. doi: 10.1007/BF02928434. DOI: https://doi.org/10.1007/BF02928434
View in Google Scholar - Krueger, A. (1974). The political economy of the rent-seeking society. American Economic Review, 64(3), 291?303.
View in Google Scholar - Kunčič, A. (2014). Institutional quality dataset. Journal of Institutional Econom-ics, 10(1), 135?161. doi: 10.1017/S1744137413000192. DOI: https://doi.org/10.1017/S1744137413000192
View in Google Scholar - Kwakwa, P. A., Adzawla, W., Alhassan, H., & Achaamah, A. (2021). Natural re-sources and economic growth: does political regime matter for Tunisia? Jour-nal of Public Affairs, 22(S1), e2707. doi: 10.1002/pa.2707. DOI: https://doi.org/10.1002/pa.2707
View in Google Scholar - Lee, K. K. (2014). Globalisation, income inequality and poverty: theory and empir-ics. Retrieved from https://core.ac.uk/download/pdf/60545338.pdf.
View in Google Scholar - Levchenko, A. (2007). Institutional quality and international trade. Review of Economic Studies, 74(3), 791?819. doi: 10.1111/j.1467-937X.2007.00435.x. DOI: https://doi.org/10.1111/j.1467-937X.2007.00435.x
View in Google Scholar - Levchenko, A. (2016). The impact of trade openness on institutions. World Devel-opment Report. Working Paper. DOI: https://doi.org/10.1596/26214
View in Google Scholar - López-Córdova, J., & Meissner, C. (2008). The impact of international trade on democracy: a long-run perspective. World Politics, 60(4), 539?575. doi: 10.135 3/wp.0.0016. DOI: https://doi.org/10.1353/wp.0.0016
View in Google Scholar - Majeed, M. T. (2014). Corruption and trade. Journal of Economic Integration, 29(4), 759?782. doi: 10.11130/jei.2014.29.4.759. DOI: https://doi.org/10.11130/jei.2014.29.4.759
View in Google Scholar - Martin, P. Mayer, T., & Thoenig, M. (2008). Make trade not war? Review of Economic Studies, 75(3), 865?900. doi: 10.1111/j.1467-937X.2008.00492.x. DOI: https://doi.org/10.1111/j.1467-937X.2008.00492.x
View in Google Scholar - Maystadt, J.-F., De Luca, G., Sekeris, P. G., Ulimwengu, J., & Folledo, R. (2014). Mineral resources and conflicts in DRC: a case of ecological fallacy? Oxford Economic Papers, 66(3), 721?749. doi: 10.1093/oep/gpt037. DOI: https://doi.org/10.1093/oep/gpt037
View in Google Scholar - Mlambo, C., & Borz, G. (2022). Politics and natural resources curse: evidence from selected African states. Cogent Social Sciences, 8(1), 2035911. doi: 10.10 80/23311886.2022.2035911. DOI: https://doi.org/10.1080/23311886.2022.2035911
View in Google Scholar - Mulwa, R., & Mariara, J. (2016). Natural resource curse in Africa: Dutch disease and institutional explanations. International Food Policy Research Institute. Working Paper. Retrieved from https://www.ifpri.org/publication/natural-resource-curse-africa-dutch-disease-and-institutional-explanations.
View in Google Scholar - Nicolini, M. (2011). On the evolution of institutional comparative advantages. Structural Change and Economic Dynamics, 22(2), 162?172. doi: 10.1016/j.st rueco.2010.12.003. DOI: https://doi.org/10.1016/j.strueco.2010.12.003
View in Google Scholar - Nihal, M., Mohammad, H. S., Ishaq, M. A., & Mashiyat, T. (2019). Foreign direct investment and institutional quality: who drives who? Journal of Economics, Finance and Administrative Science, 24(47), 145?156. doi: 10.1108/JEFAS-05-2018-0048. DOI: https://doi.org/10.1108/JEFAS-05-2018-0048
View in Google Scholar - Nunn, N., & Trefler, D. (2014). Domestic institutions as a source of comparative advantage. In G. Gopinath, E. Helpman, & K. Rogof (eds). Handbook of inter-national economics (pp. 263?315). Amsterdam: Elsevier. DOI: https://doi.org/10.1016/B978-0-444-54314-1.00005-7
View in Google Scholar - Nunn, N., & Wantchekon, L. (2011). The slave trade and the origins of mistrust in Africa. American Economic Review, 101(7), 3221?3252. doi: 10.1257/aer.101 .7.3221. DOI: https://doi.org/10.1257/aer.101.7.3221
View in Google Scholar - Ploeg, F. (2007). Africa and natural resources: managing natural resources for sustainable growth. Background paper for the African Development Bank re-port. Retrieved from http://hdl.handle.net/1814/42392.
View in Google Scholar - Reale, F. (2019). Comparative institutional advantage: an obituary. Journal of Institutional Economics, 15(4), 569?578. doi: 10.1017/S1744137418000474. DOI: https://doi.org/10.1017/S1744137418000474
View in Google Scholar - Rigobon, R., & Rodrik, D. (2004). Rule of law, democracy, openness, and income: estimating the interrelationships. NBER Working Paper, 10750. doi: 10.3386/w 10750. DOI: https://doi.org/10.3386/w10750
View in Google Scholar - Robinson, J. A., Torvik, R., & Verdier, T. (2006). Political foundations of the re-source curse. Journal of Development Economics, 79(2), 447?468. doi: 10.1016 /j.jdeveco.2006.01.008. DOI: https://doi.org/10.1016/j.jdeveco.2006.01.008
View in Google Scholar - Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9, 131?165. doi: 10.1023/B:JOEG.0000031425.7224 8.85. DOI: https://doi.org/10.1023/B:JOEG.0000031425.72248.85
View in Google Scholar - Roodman, D. (2009). How to do xtabond2: an introduction to difference GMM in Stata. Stata Journal, 9(1), 86?136. doi: 10.1177/1536867X0900900106. DOI: https://doi.org/10.1177/1536867X0900900106
View in Google Scholar - Sala-i-Martin, X., & Subramanian, A. (2012). Addressing the natural curse: an Illustration from Nigeria. Journal of African Economies, 22(4), 570?615. doi: 10.1093/jae/ejs033. DOI: https://doi.org/10.1093/jae/ejs033
View in Google Scholar - Suzuki, Y., & Gokcekus, O. (2013). Trade with the EU reduce corruption in Africa? Journal of Economic Integration, 28(4), 610?631. doi: 10.11130/jei.2013 .28.4.610. DOI: https://doi.org/10.11130/jei.2013.28.4.610
View in Google Scholar - Osei, D. B., Sare, Y. A., & Ibrahim, M. (2019). On the determinants of trade open-ness in low- and lower-middle-income countries in Africa: how important is economic growth? Future Business Journal, 5, 2. doi: 10.1186/s43093-019-0002-8. DOI: https://doi.org/10.1186/s43093-019-0002-8
View in Google Scholar - Topalova, P. (2007). Trade liberalization, poverty and inequality: evidence from Indian districts. In A. Harrison (Ed.). Globalisation and poverty. Chicago: Uni-versity of Chicago Press. doi: 10.7208/chicago/9780226318004.003.0008. DOI: https://doi.org/10.7208/chicago/9780226318004.003.0008
View in Google Scholar - UIS (2020). Retrieved from http://data.uis.unesco.org/ (20.2.2020).
View in Google Scholar - Usman, K. (2011). Does trade openness affect institutional quality? Lund Univer-sity.
View in Google Scholar - Yang, J. (2020). The effect of international trade on rule of law. Journal of East Asian Economic Integration, 17(1), 27?53. doi: 10.11644/KIEP.JEAI.2013.17. 1.258. DOI: https://doi.org/10.11644/KIEP.JEAI.2013.17.1.258
View in Google Scholar - Yushi, J., & Borojo, D. (2019). The impacts of institutional quality and infrastruc-ture on overall and intra-African trade. Economics, 13(1), 20190010. doi: 10.5018/economics-ejournal.ja.2019-10. DOI: https://doi.org/10.5018/economics-ejournal.ja.2019-10
View in Google Scholar - Wandeda, D., Masai, W., & Nyandemo, S. (2021). Institutional quality and eco-nomic growth: evidence from Sub-Saharan African countries. African Journal of Economic Review, 9(4), 106?125.
View in Google Scholar - WDI (2020). World development indicators. Retrieved from https://databank. worldbank.org/source/world-development-indicators (20.2.2020).
View in Google Scholar