The Curse of Being Landlocked: Institutions Rather than Trade

Abstract

Abstract This article revisits the long‐term economic effects of being landlocked. The conventional wisdom, which also prevails in policy circles, is that landlockedness hurts development by reducing trade. Gravity models of bilateral trade seem to confirm this view. However, there is no evidence in cross‐country data of a systematic relationship between landlockedness and country's trade to GDP ratio. Drawing on this stylised fact, the paper explores the possibility that landlockedness might affect GDP independently from its effect on trade. Theoretical considerations suggest that institutional quality could be a relevant transmission mechanism. The estimation of a system of three equations confirms that landlockedness has a negative effect on GDP and that this negative effect is transmitted through institutions rather than trade. Moreover, after controlling for the transmission via institutions and trade, landlockedness has a further negative effect on GDP. These findings call for a review of the policy approach to the development of landlocked countries.

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