Beyond Distance and Tariffs: The Gravity of Institutions in African Trade

Abstract

This study examines the effect of institutional quality on bilateral trade flows among 37 Sub-Saharan African countries and 124 of their trading partners over the period 2000–2019. Against the backdrop of Africa's persistent trade underperformance relative to the rest of the world, the study aims at; assess the heterogeneous effects of political (governance) institutions on bilateral trade flows; and evaluate the role of economic institutions in shaping bilateral trade in Sub-Saharan Africa. Using the Poisson Pseudo Maximum Likelihood with High-Dimensional Fixed Effects (PPMLHDFE) to estimate the structural gravity model, the study finds that institutional quality exerts significant but heterogeneous effects on bilateral trade flows. Specifically, government effectiveness, regulatory quality, and voice and accountability promote bilateral trade, while control of corruption and rule of law are associated with lower exports but higher imports. Political instability is positively associated with bilateral trade flows. All components of economic institutions are positively related to bilateral trade. These findings contribute to the thin literature on the institutions–trade nexus in Africa by providing the first comprehensive disaggregated analysis of both political and economic institutions using an appropriate estimator that controls for multilateral resistance terms. African countries are therefore urged to pursue deep trade agreements and institutional reforms that improve governance quality to enhance bilateral trade flows.