The Impact of Trade Openness on Institutions

The impact of opening to trade on economic institutions is likely to be multifaceted and depend crucially on country-specific circumstances. In the past decade an active body of research has studied this relationship. This framework makes is especially clear why international trade opening has the potential to transform institutions. What is needed to effect institutional change is a large and discrete change in the distribution of economic resources in society. These papers draw attention to the distribution of political power as the determinant of how institutions react to trade opening. If "rent seekers" are in power when trade opening occurs, international trade often enables them to increase their rent-seeking behavior and institutions deteriorate. If productive agents are in power, the opposite occurs. Thus, these models point to the possibility of a divergence in institutions as countries open to trade