NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Natural Openness and Good Government

Shang-Jin Wei

NBER Working Paper No. 7765
Issued in June 2000
NBER Program(s):   IFM   ITI

This paper offers a new interpretation of the connection between openness and good governance. Assuming that corruption and bad governance drive out international trade and investment more than domestic trade and investment, a naturally more open economy' as determined by its size and geography would devote more resources to building good institutions and would display lower corruption in equilibrium. In data, naturally more open economies' do exhibit less corruption even after taking into account their levels of development. Residual openness' which potentially includes trade policies is found not to be important once natural openness' is accounted for. Moreover, naturally more open economies' also tend to pay better civil servant salaries relative to their private sector alternatives indicative of the marginal benefit of good governance in a society's revealed preference. These patterns are consistent with the conceptual model.

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Document Object Identifier (DOI): 10.3386/w7765

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