metadata: authors: 0: author: Aitken,Brian J.
docna: 0: docna: Measuring trade policy intervention : a
            cross-country index of relative price dispersion
docty: Policy Research Working Paper
subtopic: Trade Policy,International Trade and Trade Rules,Rules of Origin,Competition Policy,Competitiveness and Competition Policy,Transport Services,Trade and Multilateral Issues
teratopic: International Economics and Trade
abstracts: cdata!: In the debate about the relationship
            between trade policy and growth, various measures for trade
            intervention have been used. The author presents a new
            measure based on a country's relative price structure
            and the structure of relative world prices. This measure, he
            argues, conforms more closely than existing measures to the
            concept of trade intervention. The relationship between
            openness and trade liberalization is more complicated than
            is often believed. Whether a country intervenes does not
            tell the whole story about its trade policy, and misses an
            essential aspect of intervention: which goods are favored by
            subsidies and which are protected by tariffs. The debate has
            been confused by the failure to distinguish between trade
            intervention and outward orientation. Trade intervention
            implies policies that distort the flow or pattern of trade;
            outward orientation implies incentives to export that are
            greater than incentives for import substitution. The two may
            be related but a heavily interventionist policy could be
            outwardly oriented. The index of relative price dispersion
            that the author develops has the advantage that it is
            objective, measures intervention in both exports and
            imports, is comparable across countries, and is independent
            of fluctuations in exchange rates caused by macroeconomic mismanagement.
repnme: repnme: Measuring trade policy intervention : a
            cross-country index of relative price dispersion
display_title: Measuring trade policy intervention
            : a cross-country index of relative price dispersion
listing_relative_url: /research/1992/01/699790/measuring-trade-policy-intervention-cross-country-index-relative-price-dispersion
topicv3: Price Controls m1326085 2107,Transport m1326661 135,Trade m1326924 698,Trade Policy and Integration m1327407 775,Trade Policy m1327640 776
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Policy Research Department
no_of_pages: 51
author_keys: 0: author_key: 872455
model_extractions: # **Policy Research**

**_V -VIYLO i_ Macroeconomic Adjustment and Growth WPS 838**

- This paper a product of thc Macroeconomic Adjustmcnt and Growth Division, Coountr) Economics Departmcnt- is part of a larger effort in the tIXpartmcnt to estimate policy measures relevant for growth. The research was funded by the liank's Rcsearchi Support Budget, "How Do National Policies Affect LongRun Growth'?" (RPO 676-66) Copies of thc paper arc available free from the World Bank, 1818 H Street NW, Washington **DC** 20 433. Please contact Rebecca Manin, room N 1 1-053, extension 39(65 (48 pages). January 1992.

In the debate about the relationship between trade policy and growth,various mcasures for trade intervention hiave been used, Aitken presents a new mcasure based on a country s relative price structure and the structure of relative world prices. This measure, hc argues, conforms more closely than existing measures to thc conccpt of tradc intervention.

rhe relationship between "opetness" and trade liberalization is more complicated than is often believed. Whether a country intervenes does not tell the whole storv about its trade policy, .nd misscs an essential aspect of intervention: whichi goods arc f'avored by subsidies and wihich are protected by tariffs. Indonesia and Peru, for example, havc comparable moasurcs of intervention, but the relative price of cquipment is very high in Pcru and vcr) low in Indoncsia: consumer nondurables appear to flow freely in Latin America, while prices for these goods in Japan and Korca are inexplicably high. tJnderstanding differences in the growth expericnce of these countries clearly requires a more subtle view of trade policy than "outward" and "inward" orientation, and a more informed understanding of the nature of intervention.

The debate has been confused by the f;ailurc to distinguish between tradc intervenition and outward orientation. Trade intervention implies policics that distort the flow or pattem of trade: outward orientation implies incentives to export that are greater than incentives for import substitution. The two may be related but a hcavily interx cntionist policy could be outiA ardly oriented.

And a country could impose trade policies that raise the (zverage incentive to export, while incredsing the _dispersion_ of incentives wvithin the export and import sectors - so that when such a c*,"itry liberaliies. tradc iiighlt return to its original pattern hut with incentives inwardly oricnted.

The index of rclative price dispersion that Aitken develops has the advantage that it is objective, measures intervention in both exports and imports, is comparable across countries, and is indepcndenit of fluctuations in exchange rates caused by macroeconomic mismanagement. Unlike average tariffs and mcasures of nontariff barriers and price levels, the relative pricc dispersion index measures incentive distortions _within_ categories of goods.

The Leamer index looks directly at the cffects of trade policy in!ervention. hut the theoretical assumptions required to calculate the pattem of trade in the absence of distortion are questionable. Such assumptions are unnecessary when calculating relative pricc dispersion, as world prices are directly observable.

The Policy Rescarch Workirng Paper Series diserninate the finding of uA ork under \u a) in the Bank An ohbcctive of the serics is to get these findingc out quickiy, e'en if presevrtitiomn aie lcss **tian-** fullh polished. The findings, intr pretationi, and conclusions inthese papers do not neces'sarily reprsent official Bank **Ix)cy.** Produced by **the** Poli) Research Dissemination Ccnter
# TABLE OF CONTENTS

|Problems with Commonly Used Trade Policy Measures ........................... 4|
|---|
|A Model of Relative Price Dispersion ...............................<br>.......... 8|
|Relative Price Estimation<br>...................<br>. 11|
|Computing Relative Price Dispersion ....................................... 15|
|Comparing Relative Price Dispersion and Measures of Outward Orientation ...<br>22|
|Comparisons of Relative Price Dispersion with other Intervention Measures .26|
|Conclusion ...................................................................<br>28|
|References .......................... ..................................... 30|
|Appendix .................................................................. 32|
|Trade Policy Intervention and Outward Orientation ....................... 39|

*Thii l';,i)tr wa, wvritteit iii auoll,lll uj lilt tl, \Macrol.olumi, c Adjustnlet **aid(** 'ruwthI Dision Of thie W\orld **Banik. I asit** gratefiul for comimillenlt' alid uget froml **Jolit** A.-dleriooi. Bill Ea,tPrle. **'itan FichIer.** Atni Harrisoin. **ati(l Lanti Pritcliett**
In the debate over the relationship between trade policy ana growth, a variety of measures of trade intervention have been used. In this paper, I present a new measure based on differences between a country's relative price structure and the structure of world relative prices, and argue that this measure conforms more closely than exisir1 g measures to the concept of trade intervention.

Trade policy debate has been confused by the failure to distinguish outward orientation from trade intervention. Trade intervention impl:es policies which distort the flow or pattern of trade (Edwards, 1989), while outward orientation implies that tiLe incentives to export are greater than the incentives to import substitute (Kreuger, 1978). Trade intervention is often associated with outward orientation because the two may in fac be correlated: a restr:ctively interventionist trade regime can bias production against exports through an appreciated exchange rate (see Appendix). However, a highly interventionist trade policy that balances import restrictions with export incentives may be as "outwardly oriented" as completely liberalized economy. Also, A country may impose trade policies which raise the _average_ incentive to export relative to import substitute while increasing the _dispersion_ of incentives within the import and export sectors. When such a country liberalizes, trade may return to its original pattern but with incentives inwardly oriented.

Since intervention and outward orientation are distinct, an empirical relationship between outward orientation and growth does not imply the same relationship exists between intervention and growth. To test the effects of trade intervention on growth separate from the effects of outward orientation, one needs a satisfactory cross-country measure of trade intervention. The four most widely used measures of trade policy have been trade intensity, average tariffs and coverage ratio 3
of NTB's, deviations in a country's trade pattern from that<sup>predicted by its factor endowments,</sup> and distortions in the real price level.

# 1 Problems with Commonly Used Trade Policy Measures

## **1.1** trade intensity

Trade intensity, defined for country j as (with Xj being exports and AlIj imports) is used as an indication<sup>of trade policy. A related measure,</sup> import penetration. is defined These measures are often adjusted for "structural" factors<sup>by regressing the numerator of equation 1</sup> or 2 on country specific variables such as area, income level,<sup>and CIF/FOB ratios, and redefining</sup> the measure as with rj being the residual from the regression.

Trade intensities and import penetration ratios, whether<sup>adjusteC for "structural" factors or</sup> not, are simply not measures of trade intervention. A high trade share or import share may characterize either a liberal regime or an interventionist<sup>regime in trade balance with significant</sup> export subsidies (see the model in the appendix). Trade<sup>share is even unconvincing as a measure</sup> of outward orientation; it is notoriously unstable across time<sup>as well as across countries, more so</sup> 4
than can believably be attrihuted to tra3e strategy<sup>1</sup> .

# **1.2** adjusted price level

A second trade policy iaeasure interprets the deviation of the aggregate price level of country _j (pj_ expressed in dollars) relative to the United States (PUJ) from the level predicted by the "structural" relationship (with yj being income per capita also in dollars) as a distortion reflecting trade policy (Dollar, 1990). A country's price level contains a nontraded price v hich differs systematicallv across countries with income, and a traded price, which differs from world prices only through trade policy restrictions. Increases in import restrictions can raise the price level of the economy by raising both the price of imported goods and of nontraded goods, biasing production against exports (see Appendix). But bhe resulting index does not measure intervention directly for the same reasor as the trade share; interventions designed to keep the _average_ tariff low while increasing the _variance_ of traded goods prices will _lower_ the price level. A low price level can be maintained even with a high average import tariff if exports are taxed. In this case the "adjusted" price level would fail as a measure of outward orientation as well; a low price level would be associated with a trade regime biased toward producing import substituting goods.

Il **Heinr hiIPIIt II** fi **nd, t hat** Kor(a. for * **xami pIIe- ivenit** fromi all export 'Itare of (;DP of WX to 3W/ o%er a **t velItY** e-ar **laerloa** 5
# 1.3 **administrati - measures**

Administrative measures of trade regime include average tariffs and the percent of traded products covered by NTB's. These measures reveal nothing about intervention in the export sector, and neither are precise measures of the _effect_ policy intervention on the flow of trade. The most important trade restriction for developing countries is import licensing, a restriction which is highly discretionary; a strictly enforced licensing requirement on one good could be more restrictive yet result in a lower coverage ratio than several goods with unenforced requirements. Average tariffs for imiported goods fail as intervention measures by ignoring the dispersion of tariffs within a categorv of goods. Also, the two measures are not complementary; replacing a NTB with a high tariff as is common in liberalizing coLntries increases one measure of intervention while decreasing the other.

# 1.4 quantity measures

One can determine the seriousDess of policy intervention by measuring the degree to which trade patterns are distorted froni those occurring in the absence of intervention. Such a measure has the advantage of determining the effects of intervention, thus avoiding many of the problems with administrative measures. But the "normal" pattern of trade which would occur in the absence of intervention is not observable, and some theoretical assumptions must be imposed to recover this pattern.

Leamer (1989) measures deviations of actual trade patterns from those predicted by the country's endowment using a Hecksher-Ohlin factor intensity model. Although the most theoreticaLly grounded of the measures of intervention, this index suffers from its reliance on a theory which has had questionable empirical success. In practice, the three intervention measures calculated by Leamer are only mildly correlated with one other (having rank correlations between 20 and 30 6
# percent), suggesting the index should be treated with caution.

Since all these measures are emphasizing different aspects of trade strategy, it would be surprising if they were correlated with one another. Indeed they are not. In a recent paper, Pritchet (1991) searches for correlations between the measures described above, and finds a "complete absence of correlation among them". While Harrison (1991) finds that the relationship improves when trade policy measures are observed over time. the correlation remains weak. Measures commonly used to describe trade regime cannot all be characterizing the same aspect of trade policy intervention.

If intervention is defined in terms of its effects on trade flows, one can measure intervention either by observing trade patterns deviating from non-intervention patterns, as was discussed above, or by measuring deviations of relative prices from world relative prices; in the absence of price controls, any "distortion" in the pattern of trade will also result in a deviation of relative prices from the non-intervention price structure. While measures based on relative price distortions share the advantage quantity measures have of focusing on the effects of intervention, relative price-based measures have the added advantage that prices in the absence of trade distortions are directly observed in the world economy; provided there are no other major barriers to price arbitrage across countries (such as transportation costs and nionopolies in the distribution of goods), and after allowing for systematic differences across countries in the cost of distributing goods, the prices for traded goods observed in an economy in the absence of trade barriers will equal the world prices.

Helleiner argues "there is usually no escape from difficult and costly product-by-product comparisons of domestic and world prices in search of 'tariff equivalents"' (1990). In this paper I perform such a comparison, nieasuring directly the degree to which policy intervention distorts 7
the incentives _within_ the traded sector. I will not be measurirg the effects of<sup>intervention on the</sup> _average_ Price of traded goods relative to nontraded goods, as these effects are captured<sup>in measures</sup> of deviations of the price level; an import tariff on some goods which does not change the average tariff will distort relative prices from world prices but will not raise the price _level,_ while<sup>a uniform</sup> tariff on imports matched by a uniform subsidy on exports will not distort incentives within the traded sector but will raise the price level (see Dollar, 1990, and the appendix).

# **2** A Model **of** Relative Price Dispersion

Consumption in the economy is divided between one nontraded and n traded goods. Prik arbitrage in traded goods assures that the domestic price of a traded good can deviate from the world price only through trade intervention. The log domestic dollar price in dollars of traded good i in country _j_ is where Pi' is the international price of the produced good and eij represents the impact of the<sup>policy</sup> intervention (an import restriction or an expo:t subsidy).

Traded goods, whether produced at home or imported, are not consumed in their produced form, but can only be consumed after being "distributed". Goods are transformed<sup>into "distributed</sup> goods" using a Leontieff production technology, where the inputs are the produced<sup>good and a fixed</sup> service requirement (the nontraded good) per unit of the distributed good. If<sup>goods are distributed</sup> with a constant marginal product in nontraded services, and if distribution is perfectly competitive, 8
then the log of the dollar price of distributed good i in country j will be where **_PNj_** is the domestic rontraded goods price in dollars and as is the unit service requirement. I assuine the service requirenient i,. the distribution of goods can vary across goods, but not **across** countries. The last assumption is for exposition; the results of this section hold provided the service requirement in distribution moves mionotonically with the service price.

To allow for the possibility of nominal stickiness in the face on a nominal exchange rate fluctuations. equation 6 can be expressed where _PNj_ is the domestic currency price of nontraded goods and e is the nominal exchange **rate** expressed in dollars per unit of domestic currency.

According to equation 7, differences in prices of distributed goods from world production **prices** _(P,')_ are caused by the nontraded service component required to distribute the good, changes in the exchange rate (to the extent of nominal price stickiness), and trade distortions Ejj<sup>2</sup> .

The effect of policy on prices can be isolated by subtracting the average distributed price from the distributed price pij in equation 7, and comparing this difference to the world price. Subtracting

> 2 "t1her io'-ible **differfllcf-'.** such **a,** are' **callpds bY iiio;iolpoli&s :iii** Itli **distributioti** of goods **il ill** ot **be** rotisidletf(l here If **di-triluimioii noiiooljte** are tiot niatural **mItompolIits. liit** are catised **li.** tradle polices. tite resltidiig price dlitortion- **cral** 1w laflelv attrillullu to **Inti(nvlitiou** **_E,._**

9
the mean distributed price gives the _relative_ distributed price where _p,, P, fj_ and a are average values across goods within **a** country. The relative distributed price will be influenced by the exchange rate if nontraded prices adjust slowly and the nontraded service requirement of the gcod differs from the average.

Since world prices for "produced" goods a1e not directly observable, I subtract the relative distributed price defined in eqtlation 8 for the United States from the relative price for country j<sup>3</sup> _Pij =_ **_pij -_** _Pj- (Pius - prrs) = - (,j Ej-(,us - eus) + (a, - d)(logPNj - logej - logPNus) (9)_ or rearranging terms where _A,_ is defined _A, eZUs_ - _EUCs_ - (ai - _d)logPNus_ If **Ai** and ai - _a_ could be identified, the effects of intervention on price (the term **fij** - **fj** in equation 10) could be isolated. This term represents the deviation of the _relative production_ **price** of good i in country j from world _relative production_ prices.

> Jln **t** e estinatiot, **t** he veigfIlte( average of relative Price' in OF:( countrie' **vnb** .i,hstitnitvd for **the** price in the **l iiitedi** States, lout thie result., %v-r- **itot cianged.**

10
# 3 Relati--e Price Estimation

- Although I do not observe Ai and ai a directly, I can estimate them with cross-country regresgions performed for each good i. The data used for estimation are dra''n from the last phase of the Incomes Comparison Project, which consists of goods prices relative to the United States for 151 traded and nontraded goods based on detailed price and expenditure data from a cross section of 57 countries in 1980 (Kravis, Heston and Summers, 1982; United Nations, 1986). In order to ensure the plausibility of the assumption that a, is the same across countries, I aggregate the original 151 traded a.' nontraded goods to a sam1ple of 16 traded goods and one nontraded good (see table 1)4. Prices were comiputed for these 16 traded goods and two nontraded goods (rent and services/construction) as the expenditure-weighted averages of the original 151 prices. Extensive efforts have been made in producing these data to control for cross-country differences in quality such that prices are comnpared for the same good across countries.

## **3.1** bias from the impact of intervention **on nontraded prices**

If the dollar price of nontraded goods in country j is influenced by the average policy distortion **cj,** then estimating equation 10 using nontraded prices as an explanatory variable wiU bias the estimates of **ai** - a. The relationship between nontraded prices and average tariffs and subsidies in long run equilibrium is described in a detailed model in the appendix, but will be summarized here. An increase in the average import tariff or export subsidy shifts production towards the

> _4edIlc_ ation andl health care werr d ropped fro:mi esti iiationi to avoidl **the lifficiilties** of _cross-coo o_ rv qualit, cotmparisoins **in** these gooks.

11
Table 1: Traded Goods Categories and World Expenditure Shares

|Consumer Goods:||Capital Goods:||
|---|---|---|---|
|Good|Share|Good|Share|
|Food|0.30|Transportation|0.04|
|Tobacco & Beverage|0.07|Machines|0.08|
|Clothing|0.10|Agr. Machines|0.01|
|Fuel|0.03|Elec. Equipment|0.04|
|Household|0.06|||
|Appliance|0.01|||
|Medical|0.02|||
|Auto|0.04|||
|Auto Parts|0.05|||
|Recreate - Durable|0.03|||
|Recreate - Nondur|0.02|||
|Government|0.09|||
|Other|0.01|||

traded (import competing or exporting) sector while at the same time increasing the demand for and decreasing the production of nontraded goods. The excess demand for nontraded goods must be rationed with an increase in the price of nontraded goods. The increase is less than the increase in the policy measure since both supply and demand respond to an increase in nonltraded prices.

This relationship introduces a potential bias into the estimation of equation 10. If the average distortion ej increases from a uniform increase in **fij** across goods, then **_e,j_** - cj remains orthogonal to _PNi._ If however distortions are concentrated on some goods, then ai - a would be overestimated for those goods for which **E,,** - f increased and underestimated for the goods for which eij - eJ decreased.

Estimation bias can be avoided by estimating in two stages; since service costs (mostly labor) are predicted to vary systematically with wages across countries, I first regress each of the two nontraded prices (in dollars) on income and income squared per worker (also in dollars) derived from Summers and Heston. The predicted values of these prices are now independent of the error term, and can be used to estimate a, - _d_ in equation 10.

12
# **3.2 comparing price distortion between countries with different incomes**

While it is not likely that the average level of distortion eJ greatly affects income per capita, if countries with low income levels are more likely to have high average distortion levels, then using income per worker as an instrument for nontraded prices may bias estimates of ai - a. Erzan et al find that in 1985 average tariffs were between 50 and 66 percent for countries with GDP per **capita** less then $500 and between 3 and 5 percent for countries with GDP per capita greater than $5000. NTB's coverage ratios were found to be highest among middle income countries<sup>5</sup> .

If indeed low and middle income countries have higher average distortion levels than upper income countriOs<sup>6</sup> . then the measured d.stortions in low and middle income countries will understate the true price distortions, and estimates of _a,_ - a will be biased.

The importance of this bias in comparing price distortions for two countries will increase with the difference in the countries' income levels. Let **ei,** be the estimated error eij - **_ej,_** let **_A3,_** be the estimated a, - _a_ and _,30_ be the true a, - a. Comparisons of the relative distortion for good i between countries j and _k_ can be expressed as the difference where y, is the nontraded price predicted by per capita income in country j and _Yk_ is the same in country k. According to equation 11, the estimated difference between two countries of price distortion equals the true difference plus a bias which increases with the difference in nontraded

> **5 kierage** tariff **lefelc mid,ir'tatv Ilic Impiiortalice** of tra(de harrier' **il de floleld ronninrie,:** tarifR are **amonig tfie** least **llill ort:otit harriers to** t rathI- wit Imii I **it** ( . Ilext to ailmni,iit rafile hbarritr'. tecIntiical rfeitIatioiis. atiid fronlier lelav,s,e LEitersont et al. I **_14X)_**

> 61 nles thie lhigher aerage distortion ,I **catiseuI** h\ tiniforiiil! hiilger di'tortion' e,, for all goo(d. leavilig ., -, constant **s(ee** abio%e} Ezran **t a** t **1187.** for example. fotnid( thlat for **(levelopling** coniittrie, average tariff **levek** were rottghll **tie** samiie for food aiiti for iiia,.-ifacture,.

13
prices predicted by income. While estimated<sup>price distortions in Paraguay may be comparable</sup> with estimated price distortions in Peru,<sup>caution should be used in comparing these estimated</sup> price distortions with those of Denmark.<sup>For this reason, comparisons are made within three broad</sup> income categories. As a further precaution,<sup>price dispersion was measured both over the entire</sup> sample of countries, and over a restricted<sup>sample which only considers countries in the high and</sup> middle income groups (eliminating India<sup>and most of Africa).</sup>

# 3.3 estimation

Since population densitv and urbanization<sup>are likely inputs in the distribution of goods and may</sup> affect relative prices. I include these variables<sup>in the price regressions. As indicated in equation 10,</sup> changes in the exchange rate can influence<sup>relative prices if nontraded prices are sticky. To control</sup> for this I include the log of the exchange<sup>rate in the year 1980 (the year of the ICP sample) minus</sup> the log of the average exchange rate over<sup>the previous ten years (defined as exzrate.).</sup> Deviations from world production prices<sup>are estimated using the following equation for each</sup> good i _P,J =_ A, + 131rent-p, + _32service&pj_ + /33<sup>log urban, +</sup><sup>_03_</sup> _4_<sup>_logdensity, + )3_</sup> _5_<sup>_ex.ratej +_tiij</sup> (12) where _rent-P,_ is the log rent price predicted<sup>by log income per worker, service4Pj is the log service</sup> and :onstruction price predicted by<sup>log income per worker, and ex-ratej is described above. I use</sup> the residual ,ij from the estimation of equation 12<sup>as an estimate ofE,j--,, the deviation of the</sup> relative price of good i in country j from<sup>the world relative price.</sup> 14
## 3.4 relative price estimation results

The results of the estimation of equation 12 on the restricted<sup>sample (low income countries excluded)</sup> are given in table 2. Including Low income countries reduces<sup>the percentage variation of relative</sup> prices explained by the dependent variables, but does not change the<sup>magnitude of the coefficients</sup> significantly. High nontraded goods prices substantially increase<sup>the price of consumer nondurables</sup> relative to capital goods and consumer durables; a 1 percent increase<sup>in service prices increases the</sup> _relative_ price of clothing by 0.7 percent while decreasing the _relative_<sup>price of electrical equipment by</sup> O.9K percent. This suggests the distribution of consumer nondurables<sup>is much niore labor intensive</sup> than the distribution of capital goods. Capital goods are also relatively<sup>cheaper in areas of high</sup> population density, a result suggesting lower (Listribution costs in these<sup>areas.</sup> High rent prices have a tendency to decrease prices for capital<sup>and consumer nondurable goods</sup> relative to consumer durables, but the effects are not uniform<sup>across all goods; the effect of rent</sup> prices may reflect higher inventory requirements in the distribution<sup>of consumer durables. A tem-</sup> porary depreciation of the exchange rate lowers the price<sup>of consumer nondurables relative to</sup> consumer durables and capital goods. This is the predicted response<sup>if exchange rate changes pass</sup> through to prices more slowly for capital and consumer durable<sup>goods, where products are more</sup> likely to be differentiated.

# 4 Computing Relative Price Dispersion

As indicated above, the residual from the estimation of equation 12 for good<sup>i represents the</sup> deviation of the relative price of good i for country j from the world relative<sup>price. To derive a</sup> single measure (V) of the degree to whi, _i_ relative<sup>prices in country j differ from world prices, I</sup> 15
Table 2: Explaining Differences in Relative Prices Across C'ountries

|_pij= A,+ _i3_rentp _<br>_Pi,_is the log price of tra<br>traded prices in country<br>Independent variables ar<br>|_j+ 132sertice_<br>ded good i<br>_j,_minus the<br>e explained i<br>|_pj+ /33_l<br>in country<br>same relat<br>n the text<br>|og_urban,_+/34<br> <sup>j relative to</sup><br>ive<sup>price of g</sup><br>describing<sup>equ</sup><br>|log_densityj_<br><sup>the expenditu</sup><br><sup>ood i in the</sup><br><sup>ation 12.</sup><br>|_+ i35ezrate_<br><sup>re weight</sup><br><sup>United Stat</sup>|_j_<br>_+ i7ij_<br><sup>ed sum of all</sup><br><sup>es.</sup><br>|
|---|---|---|---|---|---|---|
|Good|Coefficient|on the Ind|ependent Vari|able<br>||r-squared|
||_service-p._|_rent-P._|log_densityj_|log_urbanj_|_ex-rate,_||
|Food|0.31|-0.20|0.006|0.037<br>|0.34<br>|0.41|
||(2.1)|(1.1)|(0.4)|(0.6)|(2.0)||
|Tobacco & Beverage|-0.075|0.112|0.008|-0.182|0.16|0.17|
||(0.2)|(0.3)|(0.3)|(1.5)|(0.4)||
|Clothing|0.72|-0.28|-0.08|-0.04|-0.07|0.43|
||(3.0)|(0.9)|(3.0)|(0.3)|(0.2)<br>||
|Fuel|0.70|-0.50|0.106|0.047|0.007|0.16|
||(1.0)|(0.6)|(1.4)|(0.2)|(0.0)||
|Household|0.56|-0.14|0.006|-0.200|0.52|0.16|
||(1.8)|(0.4)|(0.2)|(1.5)|(1.4)||
|Appliance|-0.31|0.54|0.077|-0.218|-0.29|0.24|
||(0.8)|(1.2)|(1.9)|(1.3)|(0.7)||
|Autos|-1.04<br>|2.08<br>|0.034<br>|-0.003<br>|-0.20<br>|0.32|
||(2.1)|(3.2)|(0.7)|(0.0)|(0.4)||
|Auto Parts|-0.644<br>|0.934<br>|0.049<br>|0.153<br>|-0.408<br>|0.16|
||(2.0)|(2.3)|(1.4)|(1.1)|(1.1)||
|Recreate-Durable|-0.50|0.030|-0.074|0.147<br>|-0.190<br>|0.19|
||(1.4)|(0.1)|(1.9)|(0.9)|(1.4)||
|Recreate-Nondur|0.441|-0.224|-0.078|-0.087|0.62|0.14|
||(1.2)|(0.5)|(1.9)|(0.5)|(1.4)||
|Other|-0.517|1.08|-0.021|0.087|0.071|0.19|
||(1.7)|(2.8)|(0.7)|(0.7)|(0.2)||
|Government|0.271|-0.047|-0.012|0.036|-0.018|0.31|
||(1.5)|(0.2)<br>|(0.6)<br>|(0.9)<br>|(0.1)<br>||
|Transportation|-0.598|-0.528|-0.054|0.086|-0.85|0.40|
||(1.6)|(1.2)|(1.4)|(0.6)|(2.0)||
|Machines|-0.137|-0.927|-0.014|0.095|-0.216|0.48|
||(0.6)|(3.3)|(0.6)|(1.0)|(0.8)||
|Agricult. Mach.|-0.215<br>|-0.350<br>|-0.162<br>|-0.152<br>|-1.00<br>|0.40|
||(0.6)|(0.6)|(3.5)|(0.8)|(2.0)||
|Elec. Equipment|-0.953|0.192|0.023|0.286|-0.905|0.28|
||(2.7)|(0.4)|(0.6)|(1.9)|(1.8)|.<br>-|

t-statistics in parentheses Coefficients from estimation on the _restricted_<sup>sample</sup> 16
square the deviations for each good i and country j and sum the magnitudes across all goods where **c,,** is the expenditure share predicted by a cross country regression of expenditure on **income** and income squared<sup>7</sup> . The index V , represents the degree to which _relative_ prices in country j differ from world _relative_ prices.

# **4.1** relative price dispersion across countries

C'ountry rankings of intervention according to the price dispersion measure are listed in table 3 by income category. The dispersion categories in the table 3 are defined such that a country in the "low dispersion" categorv, for example, has a dispersion which is low _relative_ to those in its income category. Among the middle income countries with high dispersion are Sri Lanka, Bolivia, and Portugal. Low dispersion economies include Pakistan, the Dominican Republic, and Costa Rica. In the high income group, Japan, Israel, and Spain have high dispersion, while Austria and Italy have relatively low dispersion. For the low income countries, Nigeria, Zambia, and India are high, while Madagascar and Kenya are low.

The results listed in table 3 are separated by income categories for reasons given in section 3.2: the bias in comparing dispersion in different countries increases with the difference in the countries' income per capita (see equation 11). The numbers given are the calculated index values **Vj,** and represent the variance across goods of differences in relative prices from world relative prices; **for**

> **7\cit** _t_ **al** , (\nldlit tirt **sIiare(-** \ **'%rt' al-o ti'dI P( rt** rl **alilt** Port **iial** oi%% **0ottit( liat le-** prle **di'p,er'.ion if** Itheir actttal **expeniilitllre** lihare. are **i ited In dX\ va,** a ko calt-tilated it iitg the **'li mn** of thle _absolute_ t'alues of( **lthe** resi(litals. Thle re-,IIltitig I1ldeL **wah** lii.ll correl,t-al **ti'W ra%%. 14'I V** ranki) **_i_ lii** Ihie **vitni** of the sq(uares of **(lhe** re"iduals.

17
# Table 3: Relative Price Dispersion Within Income Categories

Middle Income Countries

|Low||Medium Low||Medium High||High||
|---|---|---|---|---|---|---|---|
|Panama|0.0372|Korea|0.0496|Guatemala|0.0606|Sri Lanka|0.102|
|Argentina|0.0358|Greece|0.0460|Peru|0.0600|Bolivia|0.0863|
|Paraguay|0.0325|Columbia|0.0418|Chile|0.0555|Portugal|0.0828|
|Dominican Rep.|0.0323|El Salvador|0.0416|Brazil|0.0546|Indonesia|0.0797|
|Costa Rica|0.0296|Ireland|0.0386|Ecuador|0.0530|Honduras|0.0749|
|Pakistan|0.0251<br>I|Venezuela<br>Morocco|0.0374<br>0.0164|Philippines<br>Tunisia*|0.0522<br>0.0704|Uruguay<br>Botswana|0.0608<br>0.1246|
|Upper Income Co|untries|||||||
|Belgium|0.0164|Norway|0.0218|Finland|0.0439|Japan|0.1368|
|France|0.0134|Luxembourg|0.0197|Canada|0.0358|Israel|0.1119|
|Italy|0.0119|Germany|0.0189|United Kingdom|0.0319|Spain|0.0554|
|Austria|0.0050|Netherlands|0.0168|Denmark|0.0271|||
|LowerIncome Co|untries*|||||||
|Mali|0.0250|Senegal|0.0317|Cameroon|0.0541|Nigeria|0.0947|
|Kenya|0.0211|Zimbabwe|0.0288|Ethiopia|0.0503|Zambia|0.0785|
|Madagascar|0.0184|Ivory Coast<br>__________________|0.0286<br>__|Malawi<br>______________________|0.0378<br>_|India<br>Tanzania|0.0670<br>0.0658|

Intensities of price dispersion are defined _within_ each income category * Based on index estimated over unrestricted sample 18
examnle Brazil, showing "medium high" dispersion in the middle income sample, has a variance of relative prices equal to 5.5 percent of the mean relative price.

The results for the middle and upper income groups were estimated using the restricted sample, in which the low income countries were not included<sup>8</sup> . Including low income countries does not change the hierarchy much for the upper income countries, but changes the hierarchy considerably for the middle income countries. Capital goods prices are relatively low for low and high income groups, and relatively high for middle income groups. The predicted relative price of capital declines with income in the restricted sample. Including low income groups in the estimation flattens the price-income relationship. Since almost all middle income countries have high capital prices, relatively poor countries within the middle income group show more price dispersion in the unrestricted sample; particularly Honduras, Indonesia, Pakistan, and Bolivia (the estimation results for the unrestricted sample are also given in the appendix).

Within middle income countries, Asia is slightly more interventionist than Latin America; Asia has a median dispersion index of 0.051 versus Latin America with a median of 0.047. Perhaps more significant is the high variance of dispersion measures across Asia (Japan and Sri Lanka with very high dispersion, Pakistan with very low dispersion), while the variance in Latin America is relatively low.

"The **rankliiig,** in **t able** 3 for **Rolt wana.** Morocco. **and(i Tuinnia** are based on e-timat ion ovpr the **ninre't** rictfd **sam,ple.** Tlhe **(cutintrie 'ranikinig** are lreserN el ifgrouped wvitIh **Ilieir** Africiln peer, **in** the low **incomiie** (at egor. **Boitswana** andi Tinisia show lhiglI disper'ion and(l loroceo **sIiows** low disper,ioii **(** aniada **I' onsid(lerablY** iniore (listorte(l **when** i*stimialed u',ing thie tinreKtricled **aniple. Tli-, I,** plriniarilv caused 1be a sIronger **e'timiat** ed cffect of **(\xcha** ge rale apIpreciation **in the** uinrestricte(d **-l tiniation,.** cothiniied withIt **(Canada having** a **vignificanll** more **i depreciated vxchtange** rate **in 19SOlt t han in** pre%ioll Year, 19
# 4.2 equipment price distortions

Whether a country intervenes may not be as important<sup>to growth as houw the country intervenes.</sup> Delong and Summers (1991) have emphasized the<sup>relationship between equipment investment and</sup> growth, arguing that a one percent increase in equipment<sup>investnient increases growth by one third</sup> of one percent. Intervention which subsidizes prices<sup>of capital goods in general or equipment in</sup> particular would encourage this type of investment.<sup>Subsidies of capital in}</sup> iay also encourage production and export growth of manufactures which use<sup>these inputs.</sup> The relative price regressions estimating equation<sup>12 allow cross-country comparisons of equip-</sup> ment price distortions fromn the world relative equipment<sup>price. Equipment price distortions are</sup> defined where k indexes equipment goods (machines, agricultural<sup>machines. and electrical equipment),</sup><sup>**_aijk_**</sup> is the expenditure share for each good, and<sup>_5,k_</sup> is the residual<sup>from regression in equation 12. Equip-</sup> ment price distortions can be used as measures of<sup>the relative incentives to engage in equipment</sup> investment: unusually high relative prices would discourage<sup>investment in equipment. Categoriza-</sup> tions by relative price dispersion and equipment price distortion<sup>are listed in table 4, and equipment</sup> price distortion measures are g.ven ir the appendix.<sup>Relative equipment price distortions vary sub-</sup> stantially across countries within each income category:<sup>Korea, for example shows high intervention</sup> and relative equipment prices 5.3 percent below the predicted<sup>level, while Peru, having comparable</sup> levels of intervention, shows relative equipment prices<sup>2.2 percent above the predicted level.</sup> Within middle income countries, Asia has significantly<sup>lower median equipment prices than</sup> Latin America, although the variance of relative<sup>equipment prices is much higher in Asia mostly</sup> 20
Table 4: Relative Equipment Prices and Relative Price<sup>Dispersion Within Income Categories</sup>

|Middle Income Countries|_Dj -E_<br>|_ajOknj_<br>k||||
|---|---|---|---|---|---|
|Relative<br>Relative Price Di|spersion|||||
|Equipment Price<br>Low<br>||Medium<br>||High<br>||
|Low<br>Pakistan|-0.0057|Greece|-0.0214|Bolivia|-0.0070<br>|
|lrehand<br>Botswana<br>________________|-0.0094<br>-0.1177|Korea|-0.052e|Honduras<br>Portugal<br>Indonesia<br>|-0.0187<br>-0.0223<br>-0.0251<br>|
|Mediuiii<br>C'osta Rica<br>Panama<br>Paraguay<br>Venezuela|0.0072<br>-0.0022<br>-0.0032<br>-0.0037|Brazil<br>El Salvador<br>Philippines<br>Tunisia<br>_Morocco'|0.0102<br>0.0019<br>-0.0044<br>-0.0010<br>0.0050|UTruguay|-0.0053|
|High<br>Argentina<br>Dominican Rep.|0.0249<br>0.0228|Columbia<br>Chile|0.0320<br>0.0295|Sri Lanka<br>Peru|0.0530<br>0.0223<br>|
|||Ecuador|0.0162|Guatemala|0.0197|
|UTpper Income Countries<br>||||||
|Low<br>___________**_____**______________|____|Norway<br>Denmark<br>_______________|-0.0238<br>-0.0296<br>_____|Finland<br>Israel<br>Japan<br>|-0.0238<br>-0.0352<br>-0.0483<br>|
|Medium<br>Italy<br>l_______________<br>Austria|0.0090<br>0.0083|Luxembourg|0.0140|United Kingdom<br>Canada|0.0075<br>-0.0214|
|High<br>France|0.0211|Netherlands|0.0275|Spain|0.0150|
|. Belgium|0.0172|Germany|0.0144|||
|Lower Inconme Countries*||||||
|Low<br>Zimbabwe|-0.0218|||Tanzania<br>Nigeria<br>Zambia|-0.0289<br>-0.0334<br>-0.0603|
|Medium<br>Kenya|-0.0089|Cameroon<br>Ivory Coast<br>Ethiopia<br>Malawi|0.0C75<br>0.0065<br>-0.0007<br>-0.0053|||
|High<br>Mali<br>Madagascar|0.0401<br>0.0320|Senegal|0.0117|India|0.0106|

equipment price distortions defined _uwithin_ income categories * Based on estimation over the unrestricted sample 21
because of high prices in Sri Lanka and<sup>Philippines and low prices in Korea, Japan, Pakistan, and</sup>

## Indonesia<sup>9</sup> .

# 5 Comparing Relative Price Dispersion and Measures of Out-

# ward Orientation

Combining intervention (the 0 .tortion<sup>of trade patterns) and outward orientation (the incentives</sup> to produce for export relative to import substitution)<sup>into a single measure of trade policy is often</sup> justified on the grounds that intervention in<sup>the form of import restrictions taxes exports, biasing</sup> incentives toward the production of import substitutez;<sup>import restrictions shift resources towards</sup> the import production, raising the prices of nontraded<sup>goods relative to the prices of exports, which</sup> are generallv deternined by world supply and<sup>demand (see appendix). Export producers now face</sup> higher input and labor costs. If there are no export<sup>subsidies to offset the anti-export bias of the</sup> import restrictions, then intervention will produce<sup>an inwardly oriented trade regime.</sup>

## 5.1 trade intensity and relative price dispersion

Outward orientation is usually measured as the<sup>ratio of trade to GDP (see equations 1 and 2); a</sup> higher share is thought to indicate an outwardly<sup>oriented regime. Often trade share is adjusted by</sup> using the portion of trade not predicted by "structural"<sup>factors such as income levels, area, and</sup> population (equation 3). A third measure<sup>is Leamer's measure of openness, which equates openness</sup> with the share of trade not predicted by differences<sup>in factor endowments. Negative correlations of</sup>

> " The **ran kinugtit** tahlE 4 for fiot,a na Morocro. **antd** Timiui,a **are** ba..edl on **t Iimlatioii oi** er tihe mnnre.tricted **sanmple.** Againi. **tli*** conntriev ra **kitiip,** are **prt-pr%** (l<sup>if groiipe(l</sup><sup>**wvih**ilit-irAfrican peer,</sup><sup>**in**the low</sup><sup>**incoine**caiegory: Bots-vaia</sup> **,Iiows 1)w P( qipi nent liricr,** . wvhikl Tit<sup>**iiia**</sup> am **(l** lorocco **hownv Iiie(iiii mquipmen t prirc'.**

22
Table 5: Rank Correlations between Relative Price Dispersion and Comnion Measures of Trade Regime

|||Income|Categor|v|
|---|---|---|---|---|
||Measure|Middle|High|Low|
|Openness|Trade Share|18|-7|-20|
|Measures'|Adjusted Trade Share|37|-28|-9|
||Leamer Openness|-24|-14|_|
|Intervention|Average Tariff|43|-|-3|
|Measures|NTB Coverage|13||4|
||Dollar (1990) Measure|-17|56|39|
||Price Level|-24|-10|13|
||Leamer (GDP)|-1|6|-|
||Leamer (Trade Share)|-60|-33||
||Leamer (R-squared)|.40|12||
|*A negative r<br>disper|elationship indicates high<br>sion is associated with lo|price<br>w trade s|hare||

price dispersion with these measures would suggest that in general outward oriented economies are more liberal.

The rank correlations listed in Table 5 reveal the relationship to be more complex. While the three measures of openness correspond to low levels of price dispersion for high and low income countries, the relationship is rather weak. With the exception of the Leamer measure, the relationship is reversed in the case of middle income countries; economies with more relative price dispersion show higher trade shares than liberal economies. The difference between the Leamer index and the other trade shares is to be expected, given that the Leamer index is more highly correlated with the raw trade share than with the "adjusted" trade share.

# 5.2 distortions **in** the price **level** and relative price dispersion

Comparisons with other measures of outward orientation confirm these results. As mentioned above, increases in import restrictions can raise the price of import substituting goods and of nontraded goods, biasing production against exports (see appendix). These price increases will be reflected in 23
the price level, converted into dollars at the nominal exchange rate. Comparisons of the price level, adjusted for "structural" differences in nontraded goods prices, can he used to construct indices of outward orientation, with a lower price level indicating a moru outward economy<sup>10</sup> .

Comparisons of price dispersion with price-based openness measures also suggest that for middle income countries, economies with more relativo price dispersion have _louwe,_ price levels. Two pricebased measures of orientation were used: David DoUar's (1991) nieasure based on a sample of 95 developing countries over the period 1976-1985, and a measure drawn from a broader sample including developed economies froni 1965-1985. Both measures, listed in Table 5. confirni the earlier iesult that interventionist middle .ncome countries are also relatively more outward oriented. Again, low and high income countries show the opposite result; high intervention implies relative inward orientation.

Table 6 plots relative price dispersion against the ten year average of price overvaluation"l. No clear pattern emerges, as expected given the correlations described above. The table does help to clear up some anomalies: Both Sri Lanka and Peru have very low price levels, for example, causing them to be considered outward oriented. But they are definitely not liberal; they have the highest measures of price dispersion among the middle income countries.

# 5.3 World Bank Measure of Outward Orientation

If outward orientation is not correlated for middle income countries with trade intervention as measured by relative price dispersion, then what is to be made of taxonomies of trade regime

> '<sup>0</sup> Sticii **nl,ua.IIres ar( .Ii)j('rt** t(, **lII0o%** % 1llv **fit** (1 hal l **lo** lla **io Iif** I itoliliial **exchiaiige rate (alat-(d** lM! **lv iacroecoltoliiC** policies. Sollle attellihp is tliadel to disel **ti he l** or **Oaslrf- nioi,niI f ,challge rate dlianige b%** a%eragillg tlte ilea-sire **over** a period of ev-sral vears ee Dollar. D **1!)!)ihi** "' rne a erage of tl.e p **rv0ou9 teli** yea r' is **highlb** correlatedl wit llthe val **u** for I )9t0 Somie **eonint rie,** liadi **1 ttI** prices significantly higher or lower **lianl** tIheir **tell** Year averages I efe **IalHe lii**

24
Table 6: Price Level (Adjusted Ten Year Average) and Relative Price Dispersion Within Income Categories see equation 4 and Dollar (1990) for a description of adjustment Middle Income C'ountries

||Relative Price Dispe<br>|rsion<br>||
|---|---|---|---|
|Price Level<br>|Low<br>|Medium<br>|H:gh<br>|
|Low<br>|Pakistan<br>|Philippians<br> <br>Ecuador<br>Chile<br>Colunmbia<br>|I truguay <sup>2</sup>'<br>Peru-1l<br>Sri Lanka-' <sup>9</sup>|
|Mlediuimi<br>|Costa Rica<br>Paraguay<br>Argentina<sup>49</sup><br>|Brazil- <sup>14</sup><br>El Salvador|Indonesia<br>Guatemala<br>Bolivia|
|High<br>|Ireland' <sup>2</sup><br>V'enezuela<br>Dominican Rep.-lo<br>Panama<br>|Greece<br>Korea|Honduras<br>Portugal|
|UTpper incom<br> <br>|e Countries<br>|||
|Low<br>l<br>|JUnited<br> <br>|____________|Kingdom'7<br>Israel<br>Canada -18<br>Spain|
|Mediumi<br>|Austria<br>France<br>Italy<br>|Norway<br>Luxembourg||
|High<br>|Belgium<br>|Denmark<br>Germany<br>Netherlands|Japan<br>Finland|
|Lower Income<br>|Countriet<br>|||
|Low<br>|Mali<sup>2 2</sup><br>Madagascar<br>|Malawi<br>Ethiopia-<br>26<br>_|India|
|Medium|Kenya<br>Zimbabwe|Zambia<br>Senegal<br>_|Tanzania<br>|
|High|Ivory Coast|Cameroon<br>-Nigeria|1 8|

The percent deviation of 1980 price level from the ten year average is given in the superscript 25
which combine these aspects into a single indicator? The 1987 World Development Report (pp. 82-83) argues for the removal of all trade barriers based on links between growth and their own measure of trade policy which have been questioned by other studies (Helleiner, 1990, Singer, 1988). This measure combines orientation with the degree of intervention categorizing countries by "trade orientation". Categories range from "strongly outward oriented", characterized by very low trade controls, to "strongly inward oriented", in which the incentive structure favors production for the domestic market.

Table 7 reveals no svstematic relationship between what the Report calls outward orientation and relative price dispersion; inward oriented countries show _louwer_ median dispersion than outward oriented countries. Korea. one of the only countries to earn the Bank's label "strongly outward oriented", has a higher level of dispersion than Argentina and the Dominican Republic, both "strcngly inward oriented" countries. Perhaps unusually high price levels reflecting overvalued exchange rates in these two countries qualify them as inward oriented despite their relative lack of intervention; but Columbia, El Salvador and Pakistan, which are also classified as inward oriented, all have lower price dispersion than Korea and moderate price levels. Overall, "inward oriented" countries also have lower median price levels than "outward oriented" countries. Based on the WDR's orientation index alone, it seems that liberalization is not necessary to achieve outward orientation.

# 6 Comparisons of Relative Price Dispersion with other Inter-

# vention Measures

Since it is now clear that outward orientation is not svstematically correlated with intervention as measured by relative price dispersion, it is worth evaluating other measures of trade regime which 26
Table 7: World Bank (1987) Measure of Trade Orientation and Relative Price Dispersion Within Income Categories

|es<br>-|_|iRelati<br>Price|ve<br>Dispersion|l|
|---|---|---|---|
|World Bank Measure|| Low<br>||Medium|| High|
|<br>Outward Oriented|<br>|<br>Korea'||
|Moderately<br>Outward Oriented||Brazil<br>ChileA<br>Uruguay|Israel|
|Moderately|Columbian|Guatemala|Honduras*|
|<br>Inward Oriented|Costa Rica<br>El Salvador<br>Pakistan|Philippians|Indonesia<br>Sri LankaA|
|Inward Oriented|Argentina'<br>Doniinican|Peru,"|Bolivia|

* iniicates high average price level

A indicates high relative equipment prices might approximate trade intervention more closely.

# **6.1** administrative measures and relative price dispersion

If average tariff measures and NTB coverage ratios characterized the effects of intervention, we might expect to see them correlated with relative price dispersion in the traded sector. They're not<sup>12</sup> . The rank correlation between NTB coverage ratios and price dispersion is low (13% for middle income countries and 4% for low income countries; see Table 5), but at least it is positive. The same is not true for tariffs; high average tariffs are seen in countries having relatively low levels of price dispersion. This suggests that average tariff levels are a poor indicator of the effects of intervention. As Helleiner points out "moving towards neutrality (by reducing tariff)...is not evidently "liberal" if it is accompanied by increasing overall dispersion of incentives." (p.884)

> 12 . Itl oilgih t e Iiieasire, a rt roIIect (-d bi I N( T 'LD for **t** lf !-ar 1X1< o **oI COiijteietPn inI** t ra(le polic regime over timiee **ix** expected for a majorit.% of **comIIit** rif

27
## **6.2 revealed quantity measures and relative price**<sup>**dispersion**</sup>

Leamer (1990) measures the absolute v. lue of cross-country<sup>deviations in trade patterns from those</sup> predicted by factor endowments in a Hecksher-Ohlin<sup>model. Trade policy intervention is expected</sup> to result in large deviations. In the absence of price controls.<sup>large distortions in trade patterns</sup><sup>**will**</sup> be accormpanied by deviations in relative prices from<sup>world relative prices. The price dispersion</sup> measure was compared with three of Leaimer's measures of<sup>intervention: deviations relative to GDP,</sup> deviations relative to predicted trade. and the percentage<sup>of trade unexplained by differences in</sup> factor endowments (the r-squared measure).

None of the Leainer measures appear to be correlated with<sup>relative price dispersion (see Table 5).</sup> The second measure in particular is highly negatively correlated<sup>with measures of price dispersion</sup> within all income groups. The first measure, deviations relative to<sup>GDP, is only slightly positively</sup> correlated for low income countries. The r-squared measure<sup>is slightly positively correlated within</sup> the high income group, but significantly negatively correlated<sup>with intervention for the middle</sup> income group. The poor performance of these indices is<sup>not surprising; by Leamer's own admission,</sup> "the first criticism of the model is that it does not explain<sup>the trade of many countries very well."</sup>

# **7 Conclusion**

The index of relative price dispersion developed here has<sup>the advantage that it is objective, that it</sup> measures intervention not just in imports but in exports as well,<sup>that it is comiparable across coun-</sup> tries, and is independent of exchange rate fluctuations caused<sup>by macroeconomic mismanagement.</sup> Unlike average tariffs, NTB measures, and price level measures, the<sup>relative price dispersion index</sup> measures incentive distortions _uwithin_ categories of goods.<sup>While the Leamer index looks directly</sup> 28
at the effects of trade policy intervention, the theoretical assumptions required to calculate the pattern of trade in the absence of distortion are questionable. Such assumptions are unnecessary when calculating relative price dispersion, since world prices are directly observable.

Comparisons of relative price dispersion with commonly used outward orientation measures reveal that the relationship between "openness" and trade liberalization is more complicated than is often believed. Not only is it hazardous to characterize a inward oriented countries as interventionist and outward oriented countries as liberal, but the characterization is simply wrong for developing countries.

Whether a countrv i..(ervenes does not tell the whole story about a country's trade policy, and miiisses an essential aspect of intervention: which goods are favored by subsidies and which are protected by tariffs. Indonesia and Peru, for example, have comparable measures of intervention, b-it the relative price of equipment is very high in Peru and very low in Indonesia; consumer nondurables appear to flow freely in Latin America, while prices for these goods in Japan and Korea are inexplicably high. ITnderstanding differences in the growth experience of these countries clearly requires a more subtle view of trade policy than "outward" and "inward oriented", as well as a more informed understanding of the nature of intervention.

29