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Read the article below and make a one page summary the article is long but just read enough to fill up one page and to get at least a B on the assignment.. The Effect of International Trade on Rule of Law

Junsok Yang

Department of Economics, The Catholic University of Korea

yanjuna@catholic.ac.kr

In this paper, we look at the relationship between international trade and the rule of

law, using the World Justice Project Rule of Law Index, which include index

figures on human rights, limits on government powers, transparency and regulatory

efficiency. Based on regression analyses using the rule of law index figures and

international trade figures (merchandise trade, service trade, exports and imports as

percentage of GDP,) international trade and basic human rights seem to have little

relationship; but trade has a close positive relationship with strong order and

security. Somewhat surprisingly, regulatory transparency and effective implementation

seems to have little or no effect on international trade and vice versa. International

trade shows a clear positive relationship with the country’s criminal justice system,

but the relationship with the civil justice system is not as clear as such. For

regulatory implementation and civil justice, services trade positively affect these

institutions, but these institutions in turn affect exports more strongly than services

trade. Finally, the effect of trade on rule of law is stronger on a medium to long

term (10-20 year) time horizon.

Keywords: Rule of Law, International Trade, Regulatory Reform, Transparency,

Institutions

JEL Classification: F19, K49, O43

I. Introduction

The relationship of international trade and investment with human rights,

democracy and regulatory efficiency have been examined for hundreds of years.

In the recent era of “globalization,” whether increased international trade and

investment hurt or help domestic political and economic institutions related to

human rights, democracy, regulatory transparency and efficiency as well as

economic growth, has been a controversial question fraught with ambiguities.

While it is generally agreed that economic growth and higher economic living

standards usually lead to better human rights, it is less clear that more political

participation, democracy and higher regulatory efficiency, the role of international

trade and investment would foster these beneficial effects. Some observers argue

Junsok Yang

that more globalization, including more international trade and investment will

lead to better institutions; other “anti-globalization” advocates argue that

globalization hurts human rights and democracy due to excessive powers and

influence given to multinational corporations or multilateral organizations such

as IMF and WTO

In this paper, we try to see whether international trade has positive effect

on human rights, democracy and regulatory efficiency as measured by the World

Justice Project (WJP) Rule of Law Index. While the two pillars of economic

globalization are international trade and foreign investment, and both pillars can

potentially affect institutions such as human rights, democracy and regulatory

transparency and efficiency, this paper looks only at international trade to the

extent of keeping the length and the subject of the paper manageable. Foreign

direct investment will be considered in a separate paper. For convenience we

will refer to the political and economic institutions examined in this paper as

“rule of law” following the conventions of WJP (2012). We note that the concept

of rule of law by WJP is wider than most usage of that term. Following WJP

(2012), the rule of law includes limiting government powers, absence of

corruption, maintaining order and security, fundamental human rights, open

government (transparency), effective regulatory enforcement, effective civil

justice system and effective criminal justice system. More details are available

below in <Table 3-1>.

In Section II of this paper, we look at the motivation behind this paper in

more detail and take a short survey of past literature, including a short

description of WJP Rule of Law Index. In Section III, we look at the individual

regression results detailing the relationship between international trade and the

various elements of rule of law. Section IV looks at the overall picture drawn

from the individual regressions, and Section V is a short conclusion.

II. Motivation and Past Literature

While there are numerous papers on international trade or globalization and

rule of law (including human rights), most of these papers have dealt with the

use and efficacy of economic sanctions: Using international trade as a tool to

coerce countries into establishing better human rights or labor rights. Trade and

investment sanctions have been often used to induce countries to change their

Many examples exist such as Stiglitz (2002) and Weiss, Thurbon and Mathews (2005).

The Effect of International Trade on Rule of Law

behaviors and institutions, and have been politically popular in many countries.

Since the Uruguay Round and NAFTA negotiations, provisions for countries

to maintain minimum labor and human rights have also been popular. Many

free trade agreements (FTAs) or regional trade agreements (RTAs) now include

conditions on human rights or labor rights

. Economists and businessmen,

however, usually point out that using economic sanctions to achieve political

goals or enforcement of human and labor rights through multilateral trade

organizations such as WTO is not the best way to impose these rights, no matter

how desirable they may seem

. Rather, they argue that less restricted

globalization, by promoting economic growth and through demonstration effects,

will lead to stronger human rights, democracy and rule of law

In various technical and non-technical literature on globalization, many

observers and scholars have argued about how globalization affects human

rights, democracy and regulations. Many observers have argued that globalization

hurts democracy in developing countries (or even advanced countries) because

it gives too much power to multilateral international organizations, while others

have argued that increasing globalization helps democracy through a rise in gross

and per-capita income in developing countries, and through a demonstration

effect where the institutions of developed economies are transplanted (directly

or with appropriate modifications) to developing countries.

Several NGOs and organizations, most notably the UN Commissioner on

Human Rights have published several reports on the relationship between

globalization (including trade and investment liberalization) and human rights.

However, these reports are legal in nature and do not deal with empirical

analyses. Rather, they examine global rules and regulations, such as WTO

Agreements, and give examples on how they can affect human rights and what

the international organizations can do to make these rules more friendly to

human rights. Also, these reports tend to take a very wide view of human rights,

which seems to include elements such as gender equality, food security, political

participation, and so on, without describing precisely what they consider to be

core human rights. However, these papers do give several examples on how

globalization and trade liberalization can affect several aspects of human right

As globalization accelerated in 1990s, and as growing economic growth

Aaronson (2011)

For example, Srinivasan (1996)

For example, Bhagwati (2004) pp. 92-96

For example,: UN-ESC(2002a), UN-ESC(2002b), UN-HCR(2003) UN-ESC(2004),

Junsok Yang

literature have shown that proper institutions, including strong rule of law, are

crucial for countries to develop economically, many observers have argued that

globalization, including economic globalization of international trade and foreign

investment, can help establish the proper institutions crucial for economic

development and growth

. While there is no set agreement on what should be

included as part of “proper institution,” proper rule of law, that includes basic

human rights, well-defined property rights, proper oversight of government and

restraints on improper use of government powers, transparency, consideration

of regulatory efficiency, institutions of conflict resolution is usually included

in the list of properties that should be a part of “good institutional structure.

”

Wilson, Mann and Otsuki have issued a series of papers trying to empirically

estimate the role of good institutional structure on trade. The authors use the

gravity model augmented with indices summarizing regulatory customs

environments that incorporate elements of transparency and lack of corruption.

They find that, using dataset of 75 countries, if countries with index numbers

below the global average improve their environments to a level halfway between

their current numbers and the global average, the improvement will result in

USD 83 billion increase in trade for regulatory environment (which includes

transparency), and USD 33 billion increase for customs environment (which

includes lack of corruption)

. Their regressions of the gravity model showed

that regulatory environment of exporters are significant at 99% level, while

customs environment of importers are significant at 95% and 90% level

depending on the model used, but regulatory environment of importers were

significant only at 90% level in one model and not significant in their second

model

. Lee, Lim, Park and Yang (2004) also found similar results. These papers

deal with aspects of rule of law dealing directly with regulations and economic

activities, and not with the human rights or judicial aspects of the rule of law:

and they assume that the rule of law exogenously affect trade, but not the other

way around.

Some observers have argued that globalization (trade and investment) and

some aspects of laws and regulations have a positive feedback effect. Countries

with better laws, regulation, and rule of law will attract more trade and

investment and have more productive economies which will lead to more trade

For example, Helpman (2007)

Rodrik (2007) Chapter 5.

Wilson, Mann and Otsuki (2004) p.21

Wilson, Mann and Otsuki (2004) Table 3

The Effect of International Trade on Rule of Law

and investment and in turn, further lead to better laws, regulation and rule of

law. This point was made forcefully with regards to rule of law dealing with

property rights. DeSoto (2003) had argued that successful development requires

“dead” capital to become “live” capital that can be used to raise liquid funds

for useful investment. Such process requires strong property rights (which can

be formal or informal), and a judicial system (civil, criminal and informal) which

will enforce these rights. Parts of the original “Washington Consensus,” before

it became politicized, also recognized the need for strong and effective property

rights

. These papers include implicit indications that better institutions will

help economic growth, which in turn will facilitate further improvement of these

institutions, in part through increased international trade and investment.

Conversely, Mann (2007), writing about China, has suggested that there may

be little relationship between globalization (trade and investment) and human

rights or better government. He argues that, because trade and investment under

the single-party Chinese government increases per-capita income and wealth of

the Chinese people, it may actually strengthen the undemocratic position of the

Chinese government. Thus, “trade has not brought an end to political repression

or the Chinese Communist party’s monopoly on power, and there is not the

slightest reason to think that it will do in the future, either. In fact, it is possible

that our trade with China is merely helping its autocratic regime to become

richer and more powerful.

” Under this argument, international trade may

actually retard some elements of rule of law

However, there is a dearth of papers which deal with these claims in an

empirical fashion. Sykes (2003) has argued that there is a positive correlation

between human rights as measured through various indices, and lower tariff

barriers on imports

. However, since tariff barriers usually have a negative

correlation with GDP per capita, it is not entirely clear whether the correlation

is due to tariffs and other barriers to trade, or whether it is a spurious relationship

that reflects the lower GDP per capita

. There are a few more papers such

as Li and Resnick (2003) and Aisedu and Lien (2011) which look at the

Williamson (2004)

Mann (2007) p.110

Bhagwati (2004) finds such arguments not very convincing. See pp.92-96

Sykes (2003) Table 1 and p.8.

For the 97 countries used in this paper, the correlation between per-capita GDP (average of figures

for 2002 to 2011, measured in 2005 constant PPP dollars) and simple average tariff rates (average

of figures for 2002 to 2011) was -0.55.

Junsok Yang

relationship between human rights and foreign direct investment. They generally

find that more FDI indicates better human rights, with possible exceptions for

natural resource-rich countries.

In this paper, we examine the relationship between international trade and

the rule of law, including human rights, aspects of democracy, legal and

regulatory efficiency, and transparency. In the next section, we will report results

from various regressions which include trade and rule of law variables. The

first set of regressions will treat trade as dependent variable and rule of law

as independent variable. The second set of regressions will treat rule of law

as dependent variables and trade as dependent variables. We take this approach

because, depending on the aspect of rule of law involved, rule of law will

“cause” more trade, while for some aspects, trade will “cause” higher rule of

law. Also, it explicitly considers the possibility of feedback effects

. However,

before we move on to the regression results, a short discussion on the rule

of law index used in this paper is warranted.

For this paper, as a relatively objective measure of the degree of human rights,

limits on government power, regulatory transparency and efficiency, and the

judicial system, we use the rule of law index from the World Justice Project

(WJP). In WJP (2012), the organization’s described goal is “to advance the

rule of law around the world.” The organization has developed a rule of law

index, which is “a quantitative tool designed to offer a comprehensive picture

of the extent to which countries adhere to the rule of law in practice.” The

index is derived by looking at 48 rule of law indicators around nine conceptual

dimensions, which is listed in <Table 2-1>. The index numbers are constructed

from over 400 variables drawn from a General Population Poll (GPP) and a

series of Qualified Respondent’s Questionnaires (QRQ). Since the first attempt

at calculating the index in 2008, the countries in the survey has grown to 97.

To date, over 97,000 people and 2,500 experts from around the world have

participated in the project

. Like the other rule of law measures such as the

Law and Order Index of the Political Risk Services, International Country Risk

Guide, and Corruption Perception Index of Transparency International, or the

human rights indices such as Freedom House ratings and the Humana Ratings

of the 1991 World Human Rights Guide, the data on WJP Rule of Law Index

Strictly speaking, since regressions examine correlation and not causality, the latter approach may

be unnecessary, but we use different additional regressors in the second approach to distinguish

the results.

WJP (2012) p.1

The Effect of International Trade on Rule of Law

Code Factor Sub-Factors

Limited

Government

Powers



Government powers are defined in the fundamental law



Government powers are effectively limited by the legislature



Government powers are effectively limited by the judiciary



Government powers are effectively limited by independent auditing and review



Government officials are sanctified for misconduct



Government powers are subject to non-government checks



Transition of power is subject to the law

Absence of

Corruption



Government officials in the executive branch do not use public office for private gain



Government officials in the judicial branch do not use public office for private gain



Government officials in the police and the military do not use public office for private

gain



Government officials in the legislative branch do not use public office for private gain

Order and

Security



Crime is effectively controlled



Civil conflict is effectively limited



People do not resort to violence to redress personal grievances

Fundamental

Rights



Equal treatment and absence of discrimination



The right to life and security of the person is effectively guaranteed



Due process of law and rights of the accused



Freedom of opinion and expression is effectively guaranteed



Freedom of belief and religion is effectively guaranteed



Freedom from arbitrary interference with privacy is effectively guaranteed



Fundamental labor rights are effectively guaranteed

Open

Government



The laws are publicized and accessible



The laws are stable



Right to petition the government and public participation



Official information is available on request

Regulatory

Enforcement



Government regulation is effectively enforced



Government regulations are applied and enforced without improper influence



Administrative proceedings are conducted without unreasonable delay



Due process is respected in administrative hearings



The government does not expropriate without adequate compensation

F7 Civil Justice



People can access and afford civil justice



Civil justice is free of discrimination



Civil justice is free of corruption



Civil justice is free of improper government influence



Civil justice is not subject to unreasonable delays



Civil justice is effectively enforced



Alternative Dispute Resolutions (ADRs) are accessible, impartial and effective.

Criminal

Justice



Criminal investigation system is effective



Criminal adjudication system is timely and effective



Correctional system is effective in reducing criminal behavior



Criminal system is impartial



Criminal system is free of corruption



Criminal system is free of improper government influence



Due process of law and rights of the accused

Informal

Justice



Informal justice is timely and effective



Informal justice is impartial and free of improper influence



Informal justice respects and protects fundamental rights

(Index number for this category is not officially calculated or reported)

<Data> World Justice Project (2012) p.11

<Table 2-1> WJP Rule of Law Index

Junsok Yang

is based on expert survey data. However, WJP goes beyond those indices by

asking more detailed questions, many of which try to get “hard” data such as

whether family members have experienced violence in the past year. Further,

survey of experts are supplemented by surveys of general population, and the

areas covered by WJP are wider than other rule of law or human rights indices.

The 2012 index figures were derived from QRQ sent to experts and

knowledgeable people in each surveyed country during 2011-2012. And GPP

has been taken from general population in three major cities of the surveyed

countries between 2009-2012.

As shown in the table, the index encompasses wide areas related to rule of

law. F4, F7 and F8 deal with “fundamental human rights” as described by

Aaronson (2011) while F1, F2 and F3 deal with limitations on powers of the

state. And F5 and F6 are areas that deal with regulatory transparency, regulatory

reform and regulatory effectiveness to raise economic productivity

. WJP

gathers information on informal justice (F9), but it does not provide any index

calulation for that, since it has not yet found an effective method to weigh

and consolidate the relevant information. For convenience, we will refer to the

eight institutional areas covered in the WJP study as “rule of law” and the

eight indices collectively as “rule of law index.” The list of 97 countries covered

by the WJP study is listed in <Appendix 1>. The index numbers for each of

eight categories are calculated to be between 0 and 1, with the higher number

indicating better rule of law.

The factors in the rule of law index can be affected by globalization. For

example, trade facilitation deals with transparency and the possibility local and

foreign interested parties to contribute to customs rule forming process

. Trade

facilitation also deals with absence of corruption. More trade is likely to lead

to more political pressure to increase transparency and reduce corruption.

International investment is thought to be related to the strength of protection

for foreign investors, which includes issues in limitation of government powers,

especially confiscation of property and repatriation of capital, the availability

QRQ is carried out annually, while GPP is carried out once every three years for each surveyed

country. More details about WJP and the rule of law index are available in WJP (2012), or Yang

(2012) in Korean.

In fact, in my first plan for this paper, I had intended to deal with regulations and its relationship

with trade only, but realized that the categories of Rule of Law Index allows much wider scope

of analyses to include human rights and government transparency.

See Yang (2006)

The Effect of International Trade on Rule of Law

of fair criminal and civil judicial systems, fairness and nondiscrimination in

regulatory enforcement, and maintenance of order and security. In recent years,

the human rights have played a major part on the success of export endeavors

in some developing countries. Thus, some observers have claimed that

globalization can play a positive role in improving the institutions related to

the rule of law.

III. Data and Regression Results

1. Effects of Trade on Rule of Law

In this section, we look at the effect of trade on human rights, limited

government and regulatory structure as measured in the WJP Rule of Law Index.

For this section, we take the approach that globalization can cause improvements

in the rule of law. The basic regression equation for this section is the following:

f





αx



δy



where

f

= rule of law index (one index among F1 through F8) (2012 figures)

= constant

= trade (total merchandise trade, service trade or exports or import)

as a percentage of GDP (average for 2002-2011)

= GDP per capita in constant US dollars (in thousands) (average

for 2002-2011)

= error

The fi variable is from the 2012 Rule of Law Report, while GDP per capita

figures are averages of the 2002-2011 figures. The average figures were used

so that we could get a medium-term indications, and any short-term business

cycle effects, including the recent global financial crisis, would be reduced. The

GDP per capita data is included in the regression because GDP per capita seems

to be the best single economic indicator in predicting the level of rule of law

The data for GDP per capita in constant US dollar terms was taken from the

World Bank website.

For the first set of regressions, we used the total amount of merchandise trade

(i.e. exports plus imports) as a percentage of GDP for x. The percentages were

See, for example, Yang (2012).

Junsok Yang

averaged over 1992 to 2001 for each country, under the assumption that there

is a medium to long term delay of ten to twenty years for trade to have effect

on the rule of law. The regression results are reported in <Table 3-1>. As

expected, GDP per capita strongly affected the index figures. Depending on

the particular index number, an increase of $1000 in GDP per capita raised

the index figure by 0.008 to 0.016. Order and security (F3) was least affected

by GDP per capita, and absence of corruption was affected the most. However,

trade did not affect the index figures at all. Thus, trade, when exports and imports

are summed together, does not seem to affect rule of law in any category.

F1 F2 F3 F4 F5 F6 F7 F8

0.475***

(0.019)

0.395***

(0.020)

0.633***

(0.017)

0.547***

(0.019)

0.427***

(0.016)

0.459***

(0.015)

0.492***

(0.013)

0.429***

(0.017)

Trade9201

0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

0.000

(0.000)

GC0211

0.012***

(0.001)

0.016***

(0.001)

0.008***

(0.001)

0.009***

(0.001)

0.012***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.545 0.666 0.408 0.449 0.658 0.670 0.575 0.585

F-stat 57.30 94.78 33.43 39.36 91.41 96.59 64.58 67.38

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; Trade9201: Merchandise trade (exports and imports) as percentage of GDP

averaged over 1992-2001

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita GDP

figures were unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-1> Effect of Merchandise Trade (1992-2001 average) on 2012 Rule of Law Indices

Next, instead of merchandise trade, we used services trade. The variable x

in this case is services trade (exports plus imports) as a percentage of GDP

averaged over 1992 to 2001. Services are sometimes thought to be more sensitive

to legal and regulatory structure, since many services depend crucially on legal

framework and environment. The regression results are reported in <Table 3-2>.

For services, criminal justice (F8) showed significance at 99% confidence level,

absence of corruption (F2) and civil justice (F7) showed significance at the

95% confidence level, and regulatory enforcement showed significance at 90%

level. When services trade increases by 1% of GDP, F2 rises by 0.003, F6

The Effect of International Trade on Rule of Law

and F7 by 0.002, while F8 rises by 0.004. Thus, criminal justice framework

seems most sensitive to services trade. However, we should note that the effects

do not seem to be large. The effect of per-capita GDP on rule of law seems

roughly compatible to <Table 3-1>.

F1 F2 F3 F4 F5 F6 F7 F8

0.460***

(0.024)

0.365***

(0.026)

0.588***

(0.021)

0.530***

(0.023)

0.414***

(0.019)

0.0430***

(0.018)

0.459***

(0.016)

0.398***

(0.022)

Svc9201

0.001

(0.001)

0.003**

(0.001)

0.004

(0.001)

0.001

(0.001)

0.001

(0.001)

0.002*

(0.001)

0.002**

(0.001)

0.004***

(0.001)

GC0211

0.012***

(0.001)

0.016***

(0.001)

0.007***

(0.001)

0.010***

(0.001)

0.013***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.577 0.674 0.474 0.500 0.705 0.695 0.616 0.596

F-stat 61.65 93.14 41.05 45.45 107.44 102.52 72.53 66.52

Obs 90 90 90 90 90 90 90 90

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; Svc9201: Services trade (exports and imports) as percentage of GDP averaged

over 1992-2001

<Note> Observations include all countries in <Appendix I> except Belgium, Lebanon, Liberia,

Serbia, UAE, and Uzbekistan (whose service trade data were unavailable), and Zimbabwe

(whose per-capita GDP figures were unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-2> Effect of Services Trade (1992-2001 average) on 2012 Rule of Law Indices

Exports and imports each may have different effect on different aspects of

rule of law. For example, intuitively, more efficient regulatory system may

impact exports more than imports since governments are more likely to reform

their regulations to improve export performance rather than import performance.

<Table 3-3> reports the regression results using exports (goods and services)

as a percentage of GDP (average of 1992 to 2001 figures). Past exports have

effect on F3 (order and security) and F8 (criminal justice) at the 99% confidence

level; and F2 (absence of corruption) and F7 (civil justice) at the 90% confidence

level. However, when exports increase by 1% of the GDP, the rule of law index

only seem to rise by 0.001, so the effect of exports on the rule of law index

is very small compared to GDP per capita, or the effect of services trade.

Junsok Yang

F1 F2 F3 F4 F5 F6 F7 F8

0.485***

(0.021)

0.379***

(0.021)

0.612***

(0.018)

0.549***

(0.020)

0.420***

(0.017)

0.432***

(0.016)

0.470***

(0.014)

0.410***

(0.018)

X9201

-0.000

(0.000)

0.001*

(0.001)

0.001***

(0.000)

-0.000

(0.000)

0.000

(0.000)

0.001

(0.000)

0.001*

(0.000)

0.001***

(0.000)

GC0211

0.012***

(0.001)

0.015***

(0.001)

0.007***

(0.001)

0.009***

(0.001)

0.012***

(0.001)

0.011***

(0.001)

0.008***

(0.001)

0.010***

(0.001)

adj R2 0.547 0.676 0.449 0.448 0.660 0.678 0.591 0.609

F-stat 58.31 100.32 39.75 39.55 93.25 100.83 69.76 74.93

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; X9201: Exports of goods and services as percentage of GDP averaged over

1992-2001

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita GDP

figures were unavailable)

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-3> Effect of Exports (1992-2001) on 2012 Rule of Law Indices

Finally, <Table 3-4> examines the regression results when imports (goods

and services) as a percentage of GDP (average of 1992 to 2001 figures) are

used as regressors. Again, F2, F3, F7 and F8 are shown to have positive effect.

F1 F2 F3 F4 F5 F6 F7 F8

0.480***

(0.024)

0.370***

(0.025)

0.588***

(0.020)

0.536***

(0.023)

0.417***

(0.020)

0.430***

(0.018)

0.467***

(0.016)

0.396***

(0.021)

M9201

-0.000

(0.001)

0.001**

(0.001)

0.002***

(0.000)

0.000

(0.000)

0.000

(0.000)

0.001

(0.000)

0.001*

(0.000)

0.001***

(0.000)

GC0211

0.012***

(0.001)

0.016***

(0.001)

0.007***

(0.001)

0.009***

(0.001)

0.012***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.546 0.677 0.480 0.449 0.661 0.675 0.588 0.614

F-stat 58.14 100.38 44.89 39.64 93.41 99.79 68.91 76.70

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; M9201: Imports of goods and services as percentage of GDP averaged over

1992-2001

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita

GDP figures were unavailable)

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-4> Effects of Imports (1992-2001) on 2012 Rule of Law Indices

The Effect of International Trade on Rule of Law

In the regressions reported above, it was assumed that there is a medium

to long term delay for trade to affect the rule of law variables. In the next

set of regressions, we try to see whether the rule of law variables are affected

with shorter time delay. In <Table 3-5>, we repeat the regression of <Table

3-1>, but use trade as a percentage of GDP averaged over 2002 to 2012. As

seen in the table, only F8 (criminal justice) is affected.

F1 F2 F3 F4 F5 F6 F7 F8

0.492***

(0.021)

0.384***

(0.022)

0.605***

(0.018)

0.553***

(0.021)

0.431***

(0.018)

0.444***

(0.016)

0.480***

(0.015)

0.409***

(0.019)

Trade0211

-0.000

(0.000)

0.000

(0.000)

0.001

(0.000)

-0.000

(0.000)

-0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.001**

(0.000)

GC0211

0.012***

(0.001)

0.015***

(0.001)

0.007***

(0.001)

0.009***

(0.001)

0.012***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.549 0.672 0.464 0.449 0.659 0.670 0.579 0.607

F-stat 58.89 98.15 42.10 39.77 92.95 97.35 66.32 74.45

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; Trade0211: Merchandise trade (exports and imports) as percentage of GDP

averaged over 2002-2011

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita GDP

figures were unavailable)

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-5> Effects of Merchandise Trade (2002-2011) on 2012 Rule of Law Indices

<Table 3-6> uses service trade as a percentage of GDP (averaged over

2002-2012) as regressors. Only F6 (regulatory enforcement) shows service trade

having a significant effect, but in the negative, so that higher percentage of

service trade as a percentage of GDP leads to lower level of regulatory

enforcement.

<Table 3-7> and <Table 3-8> uses exports and imports as percentage of GDP,

averaged over 2002-2012 respectively. F3 (order and security) and F8 (criminal

justice) are shown to be affected by trade.

Junsok Yang

F1 F2 F3 F4 F5 F6 F7 F8

0.485***

(0.017)

0.410***

(0.019)

0.641***

(0.016)

0.555***

(0.015)

0.434***

(0.014)

0.466***

(0.014)

0.495***

(0.012)

0.443***

(0.017)

Svc0211

0.000

(0.000)

0.000

(0.001)

0.001

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.001**

(0.000)

-0.000

(0.000)

0.000

(0.001)

GC0211

0.012***

(0.001)

0.016***

(0.001)

0.008***

(0.001)

0.010***

(0.001)

0.013***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.585 0.663 0.397 0.526 0.712 0.692 0.600 0.567

F-stat 65.15 90.51 31.00 51.56 113.36 103.07 69.28 60.23

Obs 92 92 92 92 92 92 92 92

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> c: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; Svc0211: Services trade (exports and imports) as percentage of GDP averaged

over 2002-2011

<Note> Observations include all countries in <Appendix I> except Iran, UAE, Uzbekistan and

Zimbabwe (whose service trade data were unavailable), and Zimbabwe (whose per-capita

GDP figures were unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-6> Effects of Services Trade (2002-2011) on 2012 Rule of Law Indices

F1 F2 F3 F4 F5 F6 F7 F8

0.492***

(0.020)

0.386***

(0.021)

0.612***

(0.017)

0.554***

(0.020)

0.428***

(0.017)

0.442***

(0.016)

0.478***

(0.014)

0.415***

(0.018)

X0211

-0.000

(0.000)

0.001

(0.000)

0.001***

(0.000)

-0.000

(0.000)

-0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.001**

(0.000)

GC0211

0.012***

(0.001)

0.015***

(0.001)

0.007***

(0.001)

0.010***

(0.001)

0.012***

(0.001)

0.011***

(0.001)

0.008***

(0.001)

0.010***

(0.001)

adj r2 0.550 0.671 0.455 0.450 0.659 0.671 0.581 0.604

F-stat 59.09 98.20 40.62 0.111 92.81 97.73 66.89 73.34

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; X0211: Exports (goods and services) as percentage of GDP averaged over

2002-2011

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita

GDP figures were unavailable)

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-7> Effects of Exports (2002-2011) on 2012 Rule of Law Indices

The Effect of International Trade on Rule of Law

F1 F2 F3 F4 F5 F6 F7 F8

0.490***

(0.023)

0.382***

(0.025)

0.592***

(0.019)

0.546***

(0.023)

0.428***

(0.019)

0.446***

(0.018)

0.480***

(0.016)

0.406***

(0.020)

M0211

-0.000

(0.000)

0.001

(0.000)

0.001***

(0.000)

-0.000

(0.000)

-0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.001**

(0.000)

GC0211

0.012***

(0.001)

0.016***

(0.001)

0.007***

(0.001)

0.009***

(0.001)

0.012***

(0.001)

0.012***

(0.001)

0.009***

(0.001)

0.011***

(0.001)

adj R2 0.548 0.670 0.476 0.448 0.659 0.669 0.578 0.604

F-stat 58.55 97.45 44.11 39.49 92.80 97.03 66.12 73.35

Obs 96 96 96 96 96 96 96 96

<Note> Dependent variable: Rule of Law Index 2012 (F1 through F8, respectively)

<Note> C: constant; GC0211: GDP per capita in thousands of US current dollars, averaged over

2002-2011; M0211: Imports (goods and services) as percentage of GDP averaged over

1992-2001

<Note> Observations include all countries in <Appendix I> except Zimbabwe (whose per-capita

GDP figures were unavailable)

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F

statistics show validity at 99% confidence level

<Table 3-8> Effects of Imports (2002-2011) on 2012 Rule of Law Indices

2. Effects of Rule of Law on Trade

In this section, we look at the feedback effects, namely the effect of rule

of law on trade. For this section, the working interpretation is that rule of law

has an effect on trade. The basic regression equation is the following:





αf



βl



γt



δy



where

= trade (total merchandise trade, service trade or exports or import)

as a percentage of GDP (average for 2002-2011)

f

= rule of law index (one index among F1 through F8) (2012 figures)

= constant

= landlock dummy (l=1 if landlocked, l=0 other wise)

= simple average (across industries) MFN tariff rates (average for

2002-2011)

= GDP in constant PPP dollars (in billions) (average for 2002-2011)

= error

The fi figures are again from the 2012 Rule of Law Report, while landlock

values were taken from the World Bank list of landlocked developing countries,

Junsok Yang

supplemented by the Wikipedia list of landlocked countries for developed

countries. Tariff and GDP figures were taken from the World Bank database.

Taking the lead from gravity models and unlike the regressions in the previous

section, we use the countries’ total GDP figures (in constant 2005 PPP dollars)

rather than GDP per capita figures as one of the additional independent variables.

We also attempted regressions with GDP per capita and the population instead

of total GDP, but both were unsatisfactory – the former because it was highly

correlated with the rule of law indices, and the latter because it usually did

not show any significance and led to slightly lower adjusted R

without showing

significant differences in results for the significance of the rule of law indices,

so we do not explicitly report them here. Further taking lead with gravity models,

we include a landlock dummy variable as an independent variable.

We note that, overall, this set of regressions show a significantly lower

adjusted R

and F-statistic

, so that these regressions have much less

explanatory power. As to be expected, all regressions show that tariff rates have

negative effect on merchandise trade and imports. However, somewhat

surprisingly, tariff rates also have a negative effect on services trade

and

exports.

Very surprisingly, whether the country is landlocked or not seems

to have little effect on trade, at least as a proportion of GDP

. The landlocked

countries included in the regressions are indicated in Appendix 1. Regression

results also show that larger countries have lower percentages of trade as GDP

If GDP rises by a billion dollars (in constant PPP terms), merchandise trade

as a percentage of GDP drops by roughly 0.007%, services trade drops by around

0.0025%, exports of goods and services drop by 0.004%, and imports of goods

and services drop by 0.005%.

We also note that, in this set of regressions, we used the rule of law index

for the year 2012 as an independent variable, but used average trade figures

for 2002-2011 as a dependent variable. Thus, literally, the timing of these

Though F-statistics are still valid at 99% confidence level

Perhaps countries with high tariffs on goods trade tend to be protectionist so they have strong

non-tariff barriers for goods and services as well

Arguments can be made that weak domestic producers (who find it difficult to export) demand

high import tariff barriers.

Perhaps the landlocked countries are very dependent on directly neighboring countries, so they

show very high proportion of trade with the surrounding countries, but not with countries further

off-distance.

though traditional gravity models of trade tends to show that larger countries have higher volume

(amount) of trade.

The Effect of International Trade on Rule of Law

Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8

100.95***

25.858

68.340***

21.517

-6.296

32.990

139.89***

35.74

88.333***

26.575

75.374***

27.509

64.856**

30.309

46.420*

24.775

2.825

33.245

51.251*

26.551

136.98***

38.820

-43.748

42.861

24.860

36.607

43.589

37.591

61.475

43.724

87.444**

33.863

Landlock

0.196

12.542

4.521

12.052

-3.168

11.326

-4.070

12.603

2.266

12.519

2.575

12.187

2.370

0.197

3.658

11.720

GDP0211

-0.007**

0.003

-0.008**

0.003

-0.008**

0.003

-0.007**

0.003

-0.007**

0.003

-0.007**

0.003

-0.007**

0.003

-0.007**

0.003

Tar0211

-3.319***

0.994

-2.261**

0.996

-1.643*

0.943

-3.911***

1.143

-2.831***

1.026

-2.604**

1.015

-2.607***

0.972

-1.961**

0.982

adj R2 0.117 0.152 0.225 0.127 0.121 0.130 0.136 0.178

F-stat 4.07 5.17 7.75 4.37 4.20 4.46 4.65 6.04

Obs 94 94 94 94 94 94 94 94

<Note> Dependent variable: Merchandise trade (exports and imports) as percentage of GDP averaged

over 1992-2001

<Note> C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211:

GDP in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN

tariff rates averaged over 2002-2011.

<Note> Observations include all countries in <Appendix I> except Liberia and Sierra Leone (tariff data

unavailable) and Zimbabwe (GDP data unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics

show validity at 99% confidence level

<Table 3-9> Effect of Rule of Law (2012) on Merchandise Trade (2002-2012)

variables can be interpreted as that future variable affects the past, which is

contrary to the laws of physics as known at this time. However, we use these

variables under the argument that rule of law usually takes time to change,

and that survey data for the rule of law variables were taken between 2009

and 2011, so that the two variables give a picture of the economy and the

rule of law over roughly a similar period of time. More practically, using older

rule of law index figures for independent variables was ruled out because the

index numbers are only available from 2009, the sample size of countries

becomes significantly smaller, and the method of calculation in the first set

of index figures were slightly different from the current index figures. Using

a shorter period average for trade figures was ruled out because the trade figures

may have been distorted due to the global financial crisis which began in 2008.

While the equations are framed in terms of “independent” variables (“cause”)

Junsok Yang

Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8

24.687***

7.392

22.472***

6.311

2.323

10.044

31.631***

10.559

25.496***

7.703

25.985***

8.060

19.771**

8.392

17.089**

7.255

5.475

9.484

8.476

7.695

32.019***

11.722

-3.821

12.666

4.557

10.464

3.771

10.852

13.284

12.678

17.160*

9.875

Landlock

-3.451

3.601

-3.274

3.525

-4.416

3.353

-4.315

3.667

-3.534

3.631

-3.771

3.551

-3.455

3.505

-3.360

3.450

GDP0211

-0.002***

0.001

-0.003***

0.001

0.003***

0.001

-0.002***

0.001

0.002***

0.001

-0.002***

0.001

-0.002***

0.001

-0.003***

0.001

Tar0211

-0.794***

0.294

-0.703**

0.304

-0.464

0.296

-0.926***

0.339

-0.798**

0.308

-0.809**

0.311

-0.722**

0.299

-0.618**

0.300

adj R2 0.123 0.132 0.190 0.121 0.122 0.121 0.131 0.150

F-stat 4.16 4.42 6.28 4.09 4.12 4.10 4.39 4.96

Obs 91 91 91 91 91 91 91 91

<Note> Dependent variable: Service trade (exports and imports) as percentage of GDP averaged over

1992-2001

<Note> C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211:

GDP in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN

tariff rates averaged over 2002-2011

<Note> Observations include all countries in <Appendix I> except Liberia and Sierra Leone (tariff data

unavailable), Iran, UAE and Uzbekistan (service trade data unavailable) and Zimbabwe (service

trade data and GDP data unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics

show validity at 99% confidence level

<Table 3-10> Effect of Rule of Law (2012) on Services Trade (2002-2012)

and “dependent” variables (“results”), the statistical relationship does not

necessarily infer causality. Thus, we expect that the rule of law indices which

were shown to have effects on trade in the previous section to also show

significant effects in the regressions listed in this section as well, and that is

what we see. However, there are some interesting differences.

<Table 3-9> shows the regression results using merchandise trade as a

percentage of GDP averaged over 2002-2012 as the dependent variable. F3

(order and security) and F8 (criminal justice) show significance at 99%

confidence level while F2 (absence of corruption) show significance at the 90%

confidence level. While it may not be surprising that order and security have

such an important effect on trade, we note that the degree of its importance

seems wildly high – indicating that for every 0.01 point increase in F3

, the

Note that the rule of law index is calculated to be between 0 and 1.

The Effect of International Trade on Rule of Law

Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8

56.561***

15.968

34.508**

13.146

-10.248

20.213

78.314***

22.151

43.800***

16.325

35.560**

16.849

27.443

18.521

22.208

15.169

3.741

20.529

39.444**

16.222

89.800***

23.785

-19.569

26.567

28.245

22.488

39.973*

23.024

54.031**

26.719

60.472***

20.733

Landlock

-3.404

7.745

-0.758

7.363

-6.325

6.940

-6.089

7.812

-1.626

7.691

-1.861

7.464

-2.143

7.366

-1.715

7.176

GDP0211

-0.004**

0.002

-0.005**

0.002

-0.005**

0.002

-0.004**

0.002

-0.004**

0.002

-0.004**

0.002

-0.004**

0.002

-0.004**

0.002

Tar0211

-1.851***

0.614

-1.261**

0.608

-0.961

0.578

-2.294***

0.709

-1.574**

0.630

-1.441**

0.622

-1.466**

0.594

-1.126*

0.601

adj R2 0.112 0.166 0.233 0.116 0.126 0.140 0.150 0.188

F-stat 3.94 5.63 8.08 4.05 4.35 4.77 5.09 6.39

Obs 94 94 94 94 94 94 94 94

<Note> Dependent variable: Exports (goods and services) as percentage of GDP averaged over 1992-2001

<Note> C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211: GDP

in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN tariff rates

averaged over 2002-2011

<Note> Observations include all countries in <Appendix I> except Liberia and Sierra Leone (tariff data

unavailable) and Zimbabwe (GDP data unavailable).

<Note> *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics

show validity at 99% confidence level

<Table 3-11> Effect of Rule of Law (2012) on Exports (2002-2012)

share of trade in GDP rises by 1.4% (making it more influential than the GDP),

and the constant term for that regression is effectively zero.

In <Table 3-10>, we repeat the same regression, but replacing the dependent

variable with services trade as percentage of GDP, averaged over 2002-2012.

Only F3 (order and security) and F8 (criminal justice) are shown to be

significant, though F8 at only 90% confidence level. The coefficient for F3

has come down greatly compared to merchandise trade.

<Table 3-11> uses exports of goods and services as percentage of GDP,

averaged over 2002-2012, as dependent variable. Many more variables are now

shown to be significant. F6 (regulatory enforcement) is significant at 90%

confidence level, F2 (absence of corruption) and F7 (civil justice) is significant

at 95% level, and F3 (order and security) and F8 (criminal justice) at 99%

level. At least in terms of estimated coefficient, F3 is shown to have the highest

effect, but as with Merchandise Trade in <Table 3-9>, the effect seems excessive.

<Table 3-12> uses imports of goods and services as percentage of GDP,

Junsok Yang

averaged over 2002-2012, as dependent variable. Again, F3 and F8 are shown

to be the only significant variables.

Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8

71.079***

14.225

53.271***

12.006

7.463

18.302

90.440***

19.198

63.582***

14.671

58.924***

15.244

52.304***

16.811

42.338***

13.891

-8.004

18.288

16.940

14.816

71.300***

21.536

-31.394

23.505

2.681

20.209

9.504

20.832

20.036

24.251

34.411*

18.986

Landlock

0.091

6.899

2.450

6.725

-0.675

6.283

-1.927

6.912

1.178

6.911

1.506

6.754

1.728

6.685

2.401

6.571

GDP0211

-0.004***

0.002

-0.005***

0.002

-0.005***

0.002

-0.005***

0.002

-0.005***

0.002

-0.005***

0.002

-0.005***

0.002

-0.005***

0.002

Tar0211

-1.981***

0.547

-1.574***

0.556

-1.078**

0.523

-2.403***

0.627

-1.389***

0.566

-1.751***

0.562

-1.691***

0.539

-1.398**

0.551

adj R2 0.154 0.165 0.245 0.169 0.153 0.154 0.159 0.183

F-stat 5.24 5.58 8.56 5.73 5.19 5.24 5.39 6.19

Obs 94

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