The Institutional Determinants of Bilateral Trade Patterns

factor endowments and technology. He emphasizes transaction costs, caused by ineffective
institutions. Even if institutions are shown to be of less direct importance for economic
performance than trade (cf. Dollar and Kraay, 2002), a strong link between the quality of
governance and trade reconfirms the importance of good governance for long-run economic
performance.

3. Description of Institutional Indicators

In our analysis, we make use of both country-specific and bilateral data, from various
sources. Gross domestic product for exporting and importing countries are examples of
country-specific variables that we include in the analysis. Geographical distance,
adjacency, main language and religion, amongst others, are examples of other
characteristics that we take into account for each pair of countries. We focus on trade
patterns in 1998, for a set of more than one hundred countries. Appendix A further
describes the data and their sources.

In this section, we take a closer look at the institutional variables that are central to the
paper. We used the database constructed by Kaufmann et al. (2002). They collected data on
institutions from different sources and constructed indicators of perceived institutional
quality. Each indicator captures some related aspects of the quality of governance. They
either reflect the political process, the quality of the state apparatus and its policies, or the
success of governance.

The first indicator is “Voice and Accountability” (Voice&Acc.), which reflects the
extent to which citizens can participate in selecting government and hold her accountable
for the actions taken. This score includes various characteristics of the political process as
well as assessments of the independence of the media. This first variable can be thought of
as reflecting whether citizens and business can prevent arbitrariness in the behaviour of
government and enforce good governance when needed.

The second indicator of institutional quality, “Political Stability” (Pol. Stab.), refers to
the perceived likelihood of government being destabilized or overthrown by
unconstitutional interference or excesses of violence against persons and possessions.
These factors are highly detrimental for the continuity of policy and the stability of the
economic environment. Think of the consequences of societal unrest for infrastructure

Bilateral Trade Flows and Institutions

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