Does Institutional Quality Promote Export Diversification in Pakistan?

Abstract

The study examines the impact of institutional quality on Pakistan’s export diversification. We measure export diversification through extensive and intensive margins of trade by using highly disaggregated data at the HS-6 digit level. We construct a composite index of institutional quality by using multiple indicators of institutional quality defined by the World Bank for Pakistan and its 69 trading partners over the period 2013-2024. The study applies gravity framework estimated using Poisson Pseudo-Maximum Likelihood (PPML) and Probit models for empirical evidence. The empirical evidence indicate that strong institutional environment in export destination markets significantly promotes export diversification in Pakistan. In contrast, institutional environment at domestic level primarily supports the intensive margin. We derive several policy implications based on empirical evidence. Pakistan should improve its domestic institutional environment to promote export performance, while greater emphasis should be placed on targeting export markets with well-established institutional frameworks, as such markets are more attractive and conducive for exporters. In addition, maintain market based exchange rate through appropriate macroprudential policies can further support export diversification. Moreover, the positive relationship between population growth in importing countries and export performance suggests that policymakers should prioritize labor intensive sectors that are more responsive to demographic trends. The study provides actionable insights for policymakers in Pakistan and offer broader lessons for developing economies on how to navigate bilateral trade relationships, expand market participation, and promote export performance in an increasingly uncertain global trade environment.