support of his claim Rodrik shows that a positive correlation exists between an economy's exposure to international trade and the size of its government. This correlation holds for most measures of govemment spending, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. In Rodrik's view, the explanation is that government spending plays a risk-reducing role in economies exposed to a significant amount of external risk. One piece of evidence in favor of this interpretation is that the relationship between openness and government spending is strongest when terms-of-trade risk is highest.

A similar correlation exists between government employment and openness (Rodrik, 1997). A large number of "secure" jobs in the public sector could thus be seen as a form of insurance against the external risk faced by the economy, especially when those who hold those jobs transfer resources to their extended families. But this interpretation is to some extent problematic. While some public sector jobs might have been created with the deliberate goal of providing income security, other explanations are equally plausible. Preliminary work with an expanded version of the database used by Rodrik suggests that the political regime, income inequality and the degree of ethno-linguistic fractionalization are good predictors of the share of the labor force employed by the public sector (Chong and Rama, 2001b). More importantly, a bloated public sector could have detrimental effects on economic performance.

7. lUDae RoRe of t1he Rufirf,magnR (Communiity Should something be done to encourage, or even force, developing countries to adopt specific labor market policies in the context of globalization? Many in the industrial world would answer this question by a resounding "yes". The perception that long-time workers in protected industries or in the public sector lose their jobs, that the unskilled see their earnings fall, that children end up working in sweatshops, and households face higher economic instability, seems a strong enough justification for this affirmative answer. But the next, obvious question is why is that developing countries fail to take the appropriate measures by themselves.

One possibility is that the governments of developing countries do not have a clear assessment of the costs and benefits of labor market policies. Uncertainty would not be surprising, given that is an ideologically charged issue, even in industrial countries. While mostly everybody agrees that government interventions in the labor market lead to a trade-off between efficiency and equity, some downplay the efficiency costs while others claim that the equity gains are negligible. From this perspective, an important role of the international community would be to assist in the identification and evaluation of these costs and benefits. This is necessarily a long-term endeavor. For most labor market policies, the evidence is still very limited. Based on that evidence, however, the efficiency and equity implications of specific labor market policies can be substantially different.

On the efficiency side, a cross-country study of economic growth during periods of economic reform shows that some of the government interventions discussed in the previous section can lead to poor performance, while others are relatively benign (Forteza 26