Measuring trade policy intervention : a cross-country index of relative price dispersion

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.