Trade, economic growth and quality of institutions in ASEAN: A case study

Widely debated among economists, the relationship between trade and growth has been a hot topic in the era of globalization. Currently, there are many studies that support the positive effects of trade on growth; on the other hand, some studies that caution us about the correlation between trade and growth have been recently published. This paper examines the effect of trade on growth in the ten countries of the Association of Southeast Asian Nations. It employs both the ordinary least squares and instrumental variable regressions to investigate the relationship between trade and growth. This paper will investigate into the effect of trade on the growth rates of Real GDP Per Capita. Since geography greatly influences the unobserved intra-trade share this paper includes the natural log of population and areas as proxy to account for the large volume of intra-trade. Moreover, since the regressor trade share is correlated with the factors that affect income the OLS regression of income on trade share is problematic. To separate the effect of trade share on income from other factors, this paper employs the constructed trade share (CTS) as the IV variable as in Frankel and Romer (1999). Lastly, the geographical factor of the CTS is also correlated with factors that affect income such as the Quality of Institutions. As a result, this paper will include Quality of Institution in the main regression. The result of the paper suggests that both trade and Quality of Institutions positively affect economic growth and Quality of Institutions has larger effect on economic growth than trade and is statistically significant.