The Missing Puzzle Piece: Could Good Governance Explain Export Performance of the Arab World

A lot has been said about the disappointing exporting performance of the Arab countries, especially for non-oil exports. However, the role of good governance institutions on such performance was hardly explored. This paper is investigating whether and how varying levels of governance institutions within the Arab world and for the Arab world in comparison to other countries of the world affect the region’s exporting performance. The focus of the analysis is the case study of Arab exports to the German economy, the leading EU economy and one of the leading world economies. Despite of the Euro- Mediterranean partnership in which Germany and much of the Arab world are members, Arab exports to Germany lag behind most of the other regions of the world including the EU, former Soviet Union countries, East Asia, North America, Balkan, Central and South Asia, South America and Sub-Saharan Africa.

The perspective adopted in this research is one that regards good governance institutions as boosting the competitiveness of private sector enterprises and consequently support their exporting potential. In this regard, institutions such as voice and accountability, rule of law, regulatory quality, control of corruption and government effectiveness are all examined. Higher levels of voice and accountability allow the private sector to organize as an interest group and influence policies that affects their performance and productivity. Rule of law increases businesspeople’s confidence and increase their investment especially in risky and innovational sectors of potential. Higher regulatory quality helps the private sector to be more productive and efficient, and government effectiveness guarantees the presence of a more professional bureaucratic apparatus able to more efficiently conduct policies and interact with businesspeople. And higher control of corruption minimizes inefficient allocation of government resources to politically connected, albeit inefficient, firms, and helps in eradicating conditions which hinder more competitive and innovative firms.

A number of OLS multivariate regressions are conducted having exports to Germany, obtained from the Comtrade dataset, as the dependent variable. As control variables the suggestions of the gravity model variables are accounted for. The independent variables of interest are the above mentioned governance variables obtained from the worldwide governance indicators dataset, an Arab Dummy variable, and the interaction term between the Arab Dummy and the governance variables. Moreover, in a number of regressions industry (or manufacturing) value added as percentage of GDP is placed among the independent variables together with its interactions with the Arab dummy and governance indicators. Empirical findings emphasize the crucial role played by voice and accountability in boosting Arab exports to Germany, and to a lesser extent the positive role of control of corruption.

With the help of the empirical findings and theoretical analysis that preceded it, the paper concludes with policy recommendations on how Arab countries could improve their exporting performance.