The Role of Institutional Quality and Institutional Quality Distance on Agricultural Trade Within a Free Trade Area : Evidence from Southern African Development Community Trade

Although the extant literature on agricultural trade analyzes the effects of various factors on agricultural trade, only a limited number of studies focus on the role of institutional quality and institutional quality distance on agricultural trade particularly between developing countries within a free trade area. This paper develops and applies a model of agricultural trade by combining the gravity model and the New Institutional Economics (NIE) analytical framework to quantify the effects of institutional quality and institutional quality distance on agricultural trade between developing countries within a trading block in Africa. The model is applied to a panel dataset for 15 Southern African Development Community (SADC) countries for the period 1991-2010. A two-stage Heckman selection model is used to analyse the data to avoid the gravity model’s shortcomings in dealing with zero trade values and heteroscedasticity. The empirical results demonstrate that institutions determine the volume of agricultural trade between SADC member states and that these impacts differ depending on the type of institution. Results show that strong economic institutions have a significant negative impact on intra-SADC agricultural trade. Furthermore, the results indicate that institutional quality distance has a significant positive impact on agricultural trade. The results imply that nontrade barriers, in the form of institutional quality and institutional quality distance, are significant factors influencing intra-SADC agricultural trade. The findings have important implications for the whole-of-SADC approach to stimulating intra-SADC trade