Institutions, Trade and Development

I In 1961 Burenstam Linder (1961) rocked the boat of the prevailing Heckscher-Ohlin trade theory by noting that much of international trade, particularly in manufactures, was among similar countries, not between countries with disparate factor endowments (as between rich and poor countries). His explanation was in terms of demand, more trade taking place among relatively rich countries with similar demand patterns for sophisticated manufactured goods. In the subsequent decades international trade theory incorporated economies of scale and imperfect competition to explain such trade, often in the form of intra-industry trade, rich countries swapping varieties of the same generic goods with one another. Only in recent years the idea is getting around that may be the similarity among rich countries is not so much in demand but in terms of institutions, particularly involving legal and contractual environment relative to that in poor countries. These institutions through their effects on transaction and production costs can affect comparative advantage in countries with divergent institutional setups .