The relationship between institutional quality and trade in Pacific Island countries

The purpose of this paper is to examine the export, import, and total trade determinants using reduced form equations for six Pacific Island countries (PICs) with an institutional focus.

A fixed effects model, controlling for AR(1) errors, using panel data for selected PICs is utilized. Controlling for common determinants of trade, four indicators of institutional quality: government effectiveness; rule of law; regulatory quality; and control of corruption are tested.

The empirical results indicate that improvements in institutional quality variables matter for improved levels of trade. The results also provide confirmation that the appreciation of currency does not significantly harm trade; higher levels of technological diffusion are vital for improved trade; and that gradual liberalization of trade through tariff reduction strongly facilitates more trade.

This study clearly points out that the institutional quality in the selected countries is a significant factor in determining the level of trade.

This paper expresses the view that institutions matter for enhanced trade.