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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