Poor institutions as a comparative advantage

Abstract

Classic theories of comparative advantage point to factor productivity and factor abundance as determinants of specialization and trade. Likewise, geography and topography can determine trade patterns. Institutions, however, are increasingly seen as important sources of comparative advantage. A global drug prohibition regime implies that institutional quality matters more than traditional sources in the drug trade. This paper theoretically models trade patterns of illicit goods and confirms the role of institutions empirically with respect to the drug trade. In particular, illicit enterprises gain force in countries where resources are scarce, drug enforcement is uncertain, and institutions are weak in absolute terms and relative to neighboring countries. I propose several policy alternatives that emphasize economic opportunity for the poor and institutional quality that complement drug prohibition.

The advantages of being disadvantaged

“…In some cases, even poor institutions can be used to go further. Cuervo‐Cazurra and Genc (2008) argued that firms having a home country with poor institutions, which generates disadvantages in the firm's operations at home (e.g., being smaller and having less sophisticated resources), can become a relative advantage when the firm moves to other countries with even more difficult governance conditions, because it developed an ability to manage in a challenging governance environment (see also Rodet, 2017).…”

International free riding on institutions

“…There are circumstances in which some parties, such as firms that would like to misappropriate surplus, may desire bad institutions that make this misappropriation possible. At least for these firms, poor institutions can confer some benefit (Rodet, 2017).…”

Corruption, institutional quality, and offshoring: How do they affect comparative advantage, inter‐country wage inequality, and economic growth?

“…Institutions affect economic activity, so they also influence comparative advantage and, in sequence, international trade (Rodet, 2017). Theories that attempt to explain countries’ trade and specialization emphasize factor endowment—for example, the Neoclassic Heckscher–Ohlin model—and technology levels—for example, the Classic Ricardo model.…”

“…Theories that attempt to explain countries’ trade and specialization emphasize factor endowment—for example, the Neoclassic Heckscher–Ohlin model—and technology levels—for example, the Classic Ricardo model. However, what most previous studies on international trade do not address is the relevance of institutions in the competitiveness of countries; indeed, due to differences in the quality of institutions, countries perform differently at the international trade level even when they have the same factor endowment and the same level of technological knowledge (Belloc, 2006; Rodet, 2017) . Furthermore, the scarce existing literature points out that a higher level of offshoring due to a lower level of corruption affects productivity (Castellani & Pieri, 2013), which in turn naturally influences comparative advantage.…”