Arab-German Trade and Institutions: The Effect of Good Governance on Arab Exports to Germany

Does good governance matter for exporting to the highly competitive markets of developed countries, especially those committed to a developmental mission centered on promoting good governance? This paper is investigating this research question. The focus of the analysis is the case study of Arab exports to the German economy, where a comparatively poor performance in comparison to that of other regions of the world is witnessed, despite geographical proximity and preferential trade agreements. Using statistical data and the literature on the subject, the paper engages in a discussion on German trade flows from Arab countries and whether governance indicators provide a good explanatory framework. The research question is then investigated empirically by running several regressions using the two-stage least-squares and Poisson pseudo maximum likelihood models. Different indicators of German exports are used as dependent variables while the independent variables are various governance indicators together with the control variables suggested by the gravity model. The obtained empirical results suggest that good governance generally boosts Arab exports to Germany and relatively more than it does for non-Arab exporters to Germany. This is especially true for governance indicators that directly affect exporting activities, such as regulatory quality and government effectiveness. For some indicators that indirectly affect exporting, however, the results are mixed for both Arab and non-Arab countries, especially for the textile industry. This sheds doubts on Germany’s developmental commitment to fostering good governance principles.