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(resource balance) and GDP is the World Bank's _World Tables 1993._ The second measure of external balance considered is the black market foreign exchange premium, BLACK. The premium is based on the differences between official exchange rates and black market rates and is calculated as 100 times the black market exchange rate minus the official exchange rate all divided by the official exchange rate. The source for BLACK is WDR9lSD, which compiled data on the Black market exchange rate from the _World Currency Yearbook._ Finally, a purchasing power parity-based outward orientation index, DOLLAR4, is considered. This index was calculated by David Dollar,<sup>6</sup> and is the weighted average of the mean price distortion between 1973 and 1985 and its standard deviation. The weights are the estimated coefficients from a regression of GDP growth on the average price distortion over the period and its standard deviation. The range of DOLLAR4 for the countries examined by David Dollar was 96 to just over 102. Higher values of DOLLAR4 are associated with greater outward orientation.

**2.4. Size of the Foreign Sector:** The taxable capacity of a government is generally expected to be greater, the greater is the size of the foreign sector. Imports and exports provide an accessible tax base and are important sources of revenue in developing countries. Greater tax revenue supports greater government expenditure. To the extent that taxable capacity limits the ability of governments to invest in the optimal level of infrastructure, governments are likely to increase expenditures on infrastructure when the size of the foreign sector is large. In addition, a large foreign sector likely entails greater competitiveness. To the extent that infrastructure investments increase the competitiveness of industry, larger foreign sectors are likely to be associated with higher expenditures on infrastructure.

The size of the foreign sector, TVALX2, is measured as the share of imports and exports of goods and nonfactor services in GDP. The data source for TVALX2 is WDR9 lSD.

2.5. **Terms of Trade Shifts:** A deterioration in the terms of trade is expected to reduce taxable capacity, forcing a government to scale back expenditures if a deterioration in the internal balance is to be prevented. Unless the composition of expenditures shifts, infrastructure investments will be proportionately reduced. They may be more than proportionately reduced if falling incomes trigger increased transfer payments or increase the pressure on the government to provide consumption goods and services to offset the decline in income. Thus, an improvement in the terms trade and government expenditures on infrastructure are expected to be positively related.

The magnitude of the terms of trade shock, TOTS, is measured as the percentage change in the terms of trade during the previous year. It is calculated from the terms of trade index TOT4 in WDR91SD as (TOT4,/TOT4,1) - 1 all multiplied by 100, where the subscript t refers to the current year. TOT4 is indexed to 100 in 1980 and measures the terms of trade as the export unit price/import unit price. Accordingly a negative value of TOTS reflects a deterioration in the terms of trade and a positive value reflects an improvement.