matters: most studies find significant effects using “rule of law” as a proxy for governance, however, robustness of the results is weaker when using corruption or democracy as proxies.

The role of governance in handicapping MENA’s economic growth is not a new thesis (see World Bank, 2003a). Weak governance has been estimated to have slowed MENA’s GDP growth by 1 to 1.5 percentage points (World Bank, 2003a). Poor governance also discourages foreign investment that can be important for job creation, innovation and trade. Unlike other regions, trade has not been a driver of job creation in MENA. Political instability is a primary source of risk and uncertainty for the region, and FDI has not only decreased but has also skewed towards sectors with low job creation and that do not support exporting (World Bank, 2013).

The low quality of governance in MENA is readily apparent in the World Governance Indicators (WGI).<sup>15</sup> World Governance Indicator scores for MENA countries are much lower relative to other countries. In five out of the six areas, MENA countries have significantly lower scores than both upper middle and high-income countries. Two governance values identified to be very relevant for MENA are inclusion and accountability (World Bank, 2003a). The WGI Voice and Accountability indicator is very closely aligned to these two values. Indeed, the MENA region ranks lower than any other in this indicator. Moreover, among all size WGI indicators, the MENA region has the lowest scores in Voice and Accountability.

Figure 6 (in the Appendix) illustrates WGI rankings given GDP per capita, averaged from 19952009. In the instance of Voice and Accountability, MENA countries perform the worst in this ranking given their level of development.

# **3. ESTIMATION**

The literature offers many studies on complementarities between country-level characteristics and policies (or country-country level interactions) towards growth and economic outcomes.<sup>16</sup> For example in the MENA region, Nabli and Veganzones-Vatoudakis (2007) find that macroeconomic stability and structural reforms are complementary in boosting GDP per capita, and that structural reforms are ineffective without macroeconomic stability. The literature on country-sector complementarities is smaller, and none of this research focuses specifically on understanding factors for trade in the MENA region. In this respect as well, this paper is a contribution to the literature.

To estimate how sector-level trade specialization is influenced by country-sector complementarities (see Box 1 for more detailed information), equations of the following basic form are estimated (Eq. 2). Variations of this basic specification are also explored and will be described in due course.

> 15 The World Governance Indictors are developed by the World Bank. World Governance Indicators and are available for six areas; Rule of Law, Regulatory Quality, Political Stability & Absence of Violence/Terrorism, Control of Corruption, Government Effectiveness, and Voice and Accountability. World Governance Indicators values are normalized between -2.5 and 2.5 with a higher value being associated with better governance.

> 16 For an example related to trade, see Freund and Bolaky, 2008

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