Do Governance Institutions Matter for Trade Flows between Sub-Saharan Africa and its Trading Partners?

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Adewuyi, Adeolu O.
Olubiyi, Ebenezer
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African Economic Research consortium
This study analyses the role of governance institutions in trade involving Sub-Saharan Africa (SSA) and its trading partners. Specifically, the objectives of this study are to: investigate the effect of institutions on trade between SSA and its trading partners; and examine whether governance institutions matter more for trade in SSA resourcepoor countries (or non-mineral products) than for trade in resource-rich countries (or mineral products). Based on a combination of strands of literature on the subject matter, we used a modified gravity model to analyse the objectives highlighted above. Using data spanning 1996 to 2014, empirical analysis involves estimating variants of gravity equations using the modified Poisson pseudo maximum likelihood estimation approaches. Empirical results show that not all governance variables matter for trade between SSA and its partners. Whether it matters or not depends on countries’ resource endowment, the pattern of trade and the direction of trade. Trade between SSA and developed countries (especially imports) is driven significantly by governance institutions, particularly the bureaucratic quality and compliance with law and order. Such importance of governance institutions could not be established in trade between SSA and Asia, which are both developing economies. Furthermore, governance institutions matter more for trade in non-mineral products than for trade in mineral products. The interaction of tariff with governance variables produced some results which suggest that inadequate governance institutions reflected in poor implementation of tariff policy may increase trade costs, thus reinforcing the negative effect of tariff on trade. Some policy recommendations were articulated to improve governance institutions in SSA to promote trade with its trading partners.
Governance institutions , Trade flows , Sub-Saharan Africa , Regional trading partners , Panel data analysis