Trade liberalization and Institutional development

Abstract

It is a widely accepted view in the literature that the majority of cross-sectional variation in institutions is related to history. The within variation however is somewhat less explored. We find that the within variation in economic institutions can be explained by trade liberalization. This relationship is robust with various indicators of economic institutions and liberalization, with different estimation techniques, in different sub-samples, and to the inclusion of additional covariates. Short-run trade liberalization appears to be more important than long-run trade liberalization. This may be indicative of a short-term trade liberalization induced shift in the long-run institutional equilibrium. We also find that the country fixed effects are highly correlated with settler mortality and other historical variables. Our results are consistent with recent theoretical developments in the political economy literature and with the �critical juncture� view of history.