Will institutional reform enhance bilateral trade flows? Analyses from different reform aspects

This paper examines the effect of various types of institutional reforms in enhancing bilateral trade flows. We examine three types of institutional reforms -- democratic political system, legal, and administrative reforms -- and distinguish an initial effect from a permanent effect on bilateral trade. Using a panel of 62 countries over 1980--2008, we find that all three types of reforms are important in enhancing bilateral trade flows, but their positive effects are only observed when the reforms are permanent. Our study concludes that permanent improvement in domestic institutions should be an important objective for policy makers to pursue in promoting trade.