4084 Ann Harrison and Andrés Rodríguez-Clare

revenue measure. The other broad conclusion we can draw from these data is that there
is a significant positive relationship between less restrictive trade policies and higher trade
shares. Pritchett (1996) suggested that:
alternative objective measures of trade policy are completely uncorrelated
across countries. This result has serious implications for empirical research
that attempts to assess the effects of liberalization on economic performance
using comparisons across countries; it also highlights the difficulties of
interpretation in these types of empirical studies.
We would argue that this is not the case: statutory tariffs are highly correlated with
revenue tariffs, indicating that they are excellent measures of trade policy. There is also
a significant and negative correlation between tariff measures and outcome measures
such as real or nominal trade shares in GDP. Nevertheless, the magnitude of the
(inverse) correlation between trade shares and trade policies is not nearly large enough
to allow proponents of free trade to argue that high trade shares always reflect a free
trade stance.
Most studies listed in Appendix Table 1 use trade volumes as a measure of open-
ness, but trade volumes are outcomes of trade policies as well as a host of factors
including geography, shifts in terms of trade, exchange rate shocks, and changes
in transport and communication costs. Much of the criticism in the important
and widely cited Rodriguez and Rodrik (1999) NBER Macro Annual paper is
directed at the inadequacy of typical proxies for openness. Rodriguez and Rodrik
find fault with Dollar (1992), Edwards (1998), and Sachs and Warner (1995) for
using exchange rate distortions as measures of trade policy, since exchange dis-
tortions reflect macroeconomic distortions, not trade policies per se. They also
critique Edwards for using a World Bank classification of trade regimes which
is subjective. While Dollar’s openness measure seems ideal because it directly
measures the deviation of domestic from international prices, Rodriguez and
Rodrik argue the measure is primarily correlated with swings in the exchange rate.
Dollar uses the following definition of openness:
! "
Pi
OPENNESSi ¼ 100
E i P USA

OPENNESS is the relative price level compared to the United States, with all price
levels converted to US dollars, using Summers-Heston country-specific consumption
price indices. A higher price level should indicate a higher degree of distortions.
Rodriguez and Rodrik (1999) argue that the law of one price does not hold in general,
and that domestic prices could be high for reasons other than trade policy. These could
include high transport costs or monopolies in distribution channels. In practice, Rodri-
guez and Rodrik show that there is no relationship between the openness measure