RESEARCH AND ANALYSIS: WORKING PAPERS
Distance, formal and informal institutions in international trade
This paper brings together three strands of literature on the determinants of international trade – distance, formal, and informal institutions – to explain differences in export performance across countries. Using an augmented gravity model, we find that the importance of formal institutions (rule of law) for bilateral trade increases with distance.
Similarly, the pro-trade effect of informal institutions (migrant networks) is larger for distant countries. After confirming that informal institutions can substitute for weak formal institutions in promoting trade, we finally show that this substitution effect does not decrease with distance. Our findings contribute to explaining the persistent negative effect of distance on the export performance of many developing countries despite reductions in trade costs, and provide guidance to policy makers in terms of trade reform, regional trade liberalization and export promotions strategies.
No: ERSD-2019-03
Authors: Rainer Lanz, Woori Lee, Victor Stolzenburg
Manuscript date: March 2019
Key Words:
International trade, Distance, Rule of law, Migrant networks
JEL classification numbers:
D23, F14, F22, L14, O43
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This is a working paper, and hence it represents research in progress. The opinions expressed in this paper are those of its author. They are not intended to represent the positions or opinions of the WTO or its members and are without prejudice to members' rights and obligations under the WTO. Any errors are attributable to the author.
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