A Nexus Between Macroeconomic Development and Bilateral Trade: The Role of National Institutional Quality

Abstract

This article investigates the impact of development and national institutions’ quality on bilateral exports. Using a framework for new trade theory, we obtain a gravity equation, containing gravity variables to analyze the impact of development and quality of institutions on bilateral exports across a panel of nations. We use panel data from 20 impoverished and 41 prosperous nations for the timespan 2005 to 2022 and employ fixed effect econometric techniques to analyze the data. The findings of this study show a strong and significant direct relationship between institutional quality and bilateral exports. Nevertheless, the quality of the institutions of the exporting country is more important than the quality of the institutions of the importing country. Bilateral exports are increased when both trading nations have the same level of quality of national institutions, according to our estimation of institutional homogeneity. Furthermore, with time, the impact related to the institutional conditions at the destination grows substantially. This is a strong outcome for all economic sectors, with bilateral trade having greater value. However, to boost bilateral trade, the government should improve the quality and development of its institutions.