Corruption and Trade Protection: Evidence from Panel Data

Abstract

This paper provides new estimates of the effects of corruption and poor institutions on trade protection. It exploits data on several measures of trade protection including import duty, international trade taxes, and the trade-GDP ratio. The paper complements the literature on the relationship between corruption and trade reform. It deviates from the previous literature in several ways. First, unobserved heterogeneity among countries have been controlled with properly specified fixed effects exploiting the time dimension present in the dataset. Secondly, instead of using tariff and non-tariff barriers, more general measures of trade protection have been used. The issue of endogeneity of corruption with respect to trade policy has been addressed using proper instruments for corruption used in previous studies. Moreover, two separate institutional measures have been used in the same regression to estimate their comparative impacts on trade policy. In general, we find that corruption and lack of contract enforcement have strong impacts to increase trade protection and negative effects on trade openness. JEL Classification: F13, O24

Corruption and assortative matching of partners in international trade

“…Additionally, we use a number of other control variables for robustness checks. It is well established in the literature that protectionism is detrimental to trade flows (see, for example, Anderson and Marcouiller 2002;Bandyopadhyay and Roy 2007;De Jong and Bogmans 2011;Thede and Gustafson 2012). We therefore control for the aggregate tariff rates of the origin and destination countries as measures of trade protectionism.…”

Corruption in International Business: Does Economic Globalization Help?

“…Similarly, the ‘protection for sale’ model propounded by Grossman and Helpman (1994) elucidates on the strategic interactions between the government and special interest groups. Along the same line, Bandyopadhyay and Roy (2007) find that corruption coupled with the lack of contract enforcement reduces economic globalization in countries. While the aforementioned works concentrate on how corruption affects trade, some other studies look into the interesting issue of how international trade, in turn, affects levels of corruption.…”

Corruption and Assortative Matching of Partners in International Trade

“…Accordingly, the authors find that strong institutions and governance are good for bilateral trade. In a study of African countries using data for 1998-2007, Musila and Sigue (2010 find that corruption both in African countries and in their trading partners adversely influences the flow of exports and imports. Dutt and Traca (2010) find that corruption reduces trade in low-tariff environments.…”