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Trade, Foreign Investment, and Industrial Policy for Developing Countries 4081

35
China
World
30

25

20

15

10

0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Figure 3 Exports as a share of GDP. Source: World development indicators database.

Y it ¼ Constant þ bOPENNESSit þ fZ it þ ai þ tt þ eit ð10Þ

Most controversies have arisen over the following three issues:


1. How to measure OPENNESS.
2. How to account for the endogeneity between Y and OPENNESS.
3. Which variables to include in the set of controls Z.
(1) How to measure openness.
There is a large debate over how to measure openness. The ideal measures for
understanding the linkages between trade policies and outcomes are measures of policies
themselves—such as tariffs and quotas, but until recently, these measures were hardly
ever used (see Harrison, 1996, for a discussion). How much of a problem is the lack
of information on statutory tariffs (in contrast to revenue tariffs) in practice? If the dif-
ference between actual tariffs and revenues are due to exemptions in the tariff schedule,
then the tariff schedule is misleading, and it would actually be better to use revenues as
a share of import value. But if the differential between revenue tariffs and statutory tar-
iffs highlighted in Table 2 reflects the restrictive impact of high barriers on trade
volumes, barriers, or corrupt practices which impose rent-seeking costs not reflected
in revenues, then using trade revenues to proxy for tariffs is not ideal.
A more fundamental problem which has plagued the literature on the relationship
between trade policies and growth is the continued use of trade volumes as a proxy
for policy. Trade volumes are affected by many different factors, including policies,

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