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Institutions and Trade: Competitors or Complements in Economic Development?

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)

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Institutions and Trade: Competitors or Complements in Economic Development?

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  1. 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

  2. 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.

  3. Rodrik’s Competition 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

  4. Growth or Levels ?

  5. 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)

  6. 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

  7. 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

  8. Baseline OLS Regression • Plus an Interaction Term

  9. Table 2. Summary Statistics

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

  11. Table 5. Interactions with each of the institutional variables

  12. 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?

  13. Concluding Comments • Levels versus growth • Institutions don’t rule • Interactions of certain ‘institutional’ variables with trade important • Policy implications

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