Does Governance Matter for Enhancing Trade? Empirical Evidence from Asia

Abstract:The primary objective of this paper is to find whether or not the governance and institutions matter for enhancing Asia’s trade. In this study, we have performed a comprehensive empirical analysis of the linkages between governance and trade at the Asian subregional level. Our results indicate that all individual governance indicators except regulatory quality have significant impact on trade in Asia, of which government effectiveness is the most crucial for Asia’s trade promotion. One of the conclusions of this paper is that soft infrastructure such as the institutions and governance are important for enhancing Asia’s trade. In other words, good governance and institutions help unlock trade potential of a region (or a nation). Improved governance, particularly at the sectoral level, can carry huge payoffs at a time when Asia is planning to pursue a free trade for the entire region. Ignoring “governance weaknesses” can stultify economic returns to free trade. Therefore, more effective policy approaches toward improved governance are needed to complement the regional trade policy in Asia and beyond.