Are institutions more important than integration?

D Mamoon, Mansoob Murshed

Research output: Working paperAcademic

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Abstract

The purpose of this paper is to empirically examine the contribution of trade liberalisation to differences in the level of prosperity across nations. In addition we compare this with the relative contribution of institutional capacity to prosperity, as well as the role of human capital accumulation in that respect. We employ several concepts of institutional quality, trade policy and openness variables following various definitions prevalent in the literature. Unlike in the comparable study by Rodrik et al. (2004) we have (a) included a role for human capital, (b) employed six institutional variables compared to one only in Rodrik et al. (rule of law), (c) included trade policy variables, and not just openness indicators and (d) expanded the set of openness measures employed. We discover that opening up domestic markets to foreign competition by revoking trade restrictions and trade barriers can be good for economic performance. Secondly, developing human capital is as important as superior institutional functioning for economic wellbeing. Indeed, the accumulation of human capital stocks via increased education might lead to improved institutional functioning, and the utilisation of policies like trade liberalisation. We find that openness counts for little per se in explaining income differences across countries. This is because it is an outcome and not a cause. Trade policies, and liberalisation, on the other hand, are not insignificant in explaining cross-country per-capita income variation. With regard to trade policies we can say that the overall policy stance, particularly those associated with black market premia in foreign exchange markets and export taxes, are most important in explaining cross-country per-capita income differences.
Original languageEnglish
Place of PublicationDen Haag
PublisherInternational Institute of Social Studies (ISS)
Number of pages42
Publication statusPublished - Nov 2005

Publication series

SeriesISS working papers. General series
Number416
ISSN0921-0210

Bibliographical note

J.E.L. classification numbers: F15, O15, O24

Series

  • ISS Working Paper-General Series

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