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Distance, formal and informal institutions in international trade

Rainer Lanz, Woori Lee () and Victor Stolzenburg ()

No ERSD-2019-03, WTO Staff Working Papers from World Trade Organization (WTO), Economic Research and Statistics Division

Abstract: 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.

Keywords: International trade; Distance; Rule of law; Migrant networks (search for similar items in EconPapers)
JEL-codes: D23 F14 F22 L14 O43 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-int
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