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This document analyzes correlations between different measures of openness for developing countries from 1970-2004. It finds: 1) Tariff levels are negatively correlated with foreign direct investment inflows, and trade volumes are positively correlated with foreign direct investment. 2) Trade flows are more highly correlated with foreign investment inflows than with tariffs. This suggests measures of openness may capture gains from foreign investment. 3) When restricting the sample to just developing countries, the negative correlations between trade policies like tariffs and trade shares, and the positive correlation between trade shares and foreign investment, are the same or stronger. Revenue tariffs are found to be a better proxy for statutory tariffs than trade shares.

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110 views1 page

File 0088 PDF

This document analyzes correlations between different measures of openness for developing countries from 1970-2004. It finds: 1) Tariff levels are negatively correlated with foreign direct investment inflows, and trade volumes are positively correlated with foreign direct investment. 2) Trade flows are more highly correlated with foreign investment inflows than with tariffs. This suggests measures of openness may capture gains from foreign investment. 3) When restricting the sample to just developing countries, the negative correlations between trade policies like tariffs and trade shares, and the positive correlation between trade shares and foreign investment, are the same or stronger. Revenue tariffs are found to be a better proxy for statutory tariffs than trade shares.

Uploaded by

Ed Z
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Trade, Foreign Investment, and Industrial Policy for Developing Countries 4083

Table 4 Developing countries only

Correlation between Different Openness Measures


Revenue tariffs Openness
Exchange Statutory Real
Trade taxes/ (X þ M/ DFI/GDP
rate Tariffs openness
Trade volumes GDP)

Revenue tariffs !0.0194 1.0000


(Trade taxes/ 188 435
Trade volumes)
Tariffs !0.1051 0.5863# 1.0000
180 301 323
Openness 0.0153 !0.3594# 0.3556# 1.0000
(X þ M/GDP) 196 392 313 432
Real openness !0.0625 !0.2370# !0.3473# 0.8379# 1.0000
200 423 315 419 470
DFI/GDP 0.0377 !0.2465# !0.3291# 0.4568# 0.3685# 1.0000
196 406 311 415 439 450

Notes: Data from World Bank. Time period includes 1970–2004. The asterisk indicates significant at the 5% level.
Number of observations are underneath correlation coefficient.

• The negative correlation coefficient between trade policies (tariffs) and outcomes
(trade shares) does not depend on how tariffs or trade shares are measured.
• Tariff levels are highly (negatively) correlated with the ratio of foreign investment
inflows to GDP, and trade volumes are highly (positively) correlated with foreign
investment inflows. In fact, trade flows are more highly correlated with foreign
investment inflows than they are with tariffs. These correlations suggest that measures
of openness may also be capturing the gains from foreign investment inflows.
• The correlations are the same or stronger if we restrict the sample to developing
countries (see Table 4). Trade taxes as a share of trade flows continue to be highly
correlated with actual tariffs. The correlation coefficient between trade shares and
both tariff measures increases to (negative) 0.36.
These stylized facts suggest that trade taxes as a share of trade (revenue tariffs) are a much
better proxy for statutory tariffs than trade shares. The correlation coefficient of statutory
tariffs with revenue tariffs is significantly higher than the correlation of statutory tariffs
with trade shares (0.70 versus !0.35). Yet researchers continue to rely on trade shares
as a measure of trade policy, despite the easily available (World Bank or IMF) tariff

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