The MENA region's need for more democracy and less bureaucracy: A gravity model controlling for aspects of governance and trade freedom in MENA

Abstract

AbstractThis paper considers a domain of governance and trade freedom indicators in order to reveal some of the dimensions along which the MENA region's intra‐regional trade and export intensity might be fostered. Historically, conflicts, crises and oil interests have impeded intra‐MENA integration efforts and kept trade‐flow intensities between the region's countries below those of its trade with RoW. But it seems evident that similarities in the governance and trade freedom indicators of MENA countries would promote such trade flows. Our empirical methodology here is to use a classical trade gravity model with augmented variables to measure intra‐regional trade and export flows for MENA countries and compare them with flows for MENA_E.U. and MENA_RoW. We develop three sets of scenarios to capture the impact of governance and trade freedom indicators accordingly: First, we introduce a standardised polity index to measure its impact on accelerating intra MENA's export flows compared with MENA_EU and MENA_RoW. Second, we introduce a range‐based Polity IV index and trade freedom index to test whether similarity in the governance indicators of MENA countries leads to significant intra‐regional trade flows. We also test the interaction between both. Finally, to check the robustness of export flows, we include World Governance Indicators (WGI) and their sub‐components in the estimations. The main result is that when two MENA trade partners are both classified as mixed regimes under the Polity IV index ranges, the coefficient becomes highly significant and bilateral trade flows increase by 1.25%. Components of (WGI) specifying government effectiveness, rule of law and control of corruption increase exports for MENA's origin exporter countries. Finally, the interaction term (Polity IV and Trade freedom ranges) captures continuous improvement in the quality of governance and self‐regulated systems implemented by governing executives and authorities as they shift away from pressure and interest groups. This leads to higher degrees of mutual understanding and benefits to the region's trade flows and policies.