Essays on international trade and institutions

Abstract

This dissertation consists of three essays in the intersection of International Trade and Institutions. The first essay looks at the effect of trade opening on the efficiency of institutions. I argue that part of the reason why some developing economies have not experienced a boost in economic performance despite increasing trade openness may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak political institutions may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways. In the second essay, I analyze how the inefficiency of weak political regimes is shaped by the elites' factor endowments, and how those inefficiencies alter standard predictions about international trade and capital flows. Elites always distort sectors that use intensively factors they own on a larger share less, irrespective of the endowment of the economy.

(cont.) This implies that, with trade opening, predictions about factor content of trade can be reversed if the elites' factor endowments differ from that of the economy. A capitalist elite will distort capital-intensive sectors less than others, which may more than compensate for the scarcity of that factor, and make the country a net exporter of capital-intensive goods. Also, when opening to international capital markets, the direction of capital flows can be reverted. The elites will distort capital-intensive sectors less, which may more than compensate for the abundance of capital, and drive its return above that on the rest world. The third essay provides econometric evidence that the model in the first essay is consistent with the data. Using a panel of 92 countries and 17 years, I show that non-democratic regimes that trade more experience more expropriation, while this is not the case for democratic regimes. The results are robust to different econometric specifications and different sets of controls.