The governance threshold in international trade flows

Zusammenfassung

This paper studies the flows of international trade from an institutional comparative advantage perspective. It establishes a good governance threshold necessary for the well-functioning of commerce. The paper incorporates institutional quality into the gravity equation of trade through an iceberg transaction cost. Then, it replicates accessibility to foreign markets based on bilateral distance and geographical characteristics as suggested by Redding and Venables (2004) in order to estimate the GDP equation incorporating the World Bank Governance Matters indicators. The results show that only when a country enjoys high enough government effectiveness can it effectively benefit from accessibility to markets. Attributing good governance to a country that has not could imply an increase in GDP of around 20 percent.