Good Governance and Trade Policy

2 Summary Economists generally argue that the level and structure of a country's own trade barriers, as well as the "quality" of its governance policies, such as regulations on foreign investment or bureaucratic "red tape" on commercial activity, will have a major influence on its economic growth and performance. However, a problem previously encountered in attempts to test these relations empirically was that no objective crosscountry indices of the quality of governance were available, nor were general statistics on developing countries' trade barriers. Several new sources of empirical information help fill these information gaps and can be used to test the influence of trade and governance policies on economic performance. This study conducts these tests utilizing a model similar to those employed in the literature on the causes and implications of economic growth. However, our analysis differs somewhat in that we focus more heavily on an alternative measure of economic performance-the World Bank's index of the speed with which countries are integrating into the global economy. Our results show countries which adopted less commercially restrictive governance and trade policies generally achieved significantly higher levels of GDP per capita, they experienced higher growth rates for exports, imports and GDP, and were more successful in integrating into the global economy. Regression results indicate national trade and governance regulations explain over 60 percent of the variance in some measures of economic performance-which implies that a country's own national policies are a major determinant of its rate of development, industrialization and growth. Our tests also provide new insights concerning the phenomenon of economic "convergence" in that they show poorer open countries are integrating more rapidly into the global economy than others. This finding parallels what others have observed in economic growth rates. This study tests its empirical results in a "case study" involving Sub-Saharan Africa, and asks whether inappropriate national policies caused the region's dismal economic performance? The evidence strongly supports this proposition. Indices of the quality of national governance show African countries have generally adopted the most inappropriate (restrictive) fiscal, monetary, property and wage policies, and their own trade barriers (including customs procedures that are a major constraint to commercial activity) are among the highest of any other regional group. Regression tests indicate that an "improvement" of African trade and governance policies to levels that currently prevail in such (non-exceptional) countries like Panama, Jordan, or Sri Lanka would be consistent with a seven-fold …