Commerce and institutions: Trade, scope, and the design of regional economic organizations

The design of current regional economic organizations (REOs) is remarkably diverse. Some REOs address numerous economic issues, while others have only limited mandates. Some REOs have an independent bureaucracy and a legalized dispute settlement mechanism (DSM), while others do not. What determines this institutional variation? Thinking about these institutions as devices that generate credible commitment to a rule-based regional cooperation, institutionalists maintain that the intensity of commercial ties determine regional institutionalization and institutional independence. A number of studies question this logic and argue that it is “naïve.” Empirical evidence on the links between commerce, economic scope, and regional institutions is scant, however. Using an original data set that contains detailed information on the economic activities and institutional structure of twenty-eight REOs over three decades, this paper presents one of the first systematic analyses of these relationships. The empirical analysis indicates that the institutionalist wisdom is right after all. It shows that higher levels of regional trade are associated with greater institutionalization and economic scope, but only if implementation of signed agreements is accounted for, and that regional commerce and greater economic scope are associated with more independent bureaucracies and more legalized DSMs.