Sachs & Warner (1995), again

Defending the $1 trillion estimate of American gains from globalisation he produced with co-authors, Gary Hufbauer writes:

Dani Rodrik took us to task for exaggerating the benefits of globalization. Professor Rodrik long ago established his reputation as a globalization skeptic; today he is the favorite Harvard economist among the backlash crowd. In 1997, Rodrik voiced a critical note in a book published by the Institute for International Economics, Has Globalization Gone Too Far? Two years later, Francisco Rodríguez and Rodrik (1999) [JD: link added] notched their academic guns against Jeffrey Sachs and Andrew Warner (1995), questioning the benefits of liberal trade policy for developing countries. As targets of Rodrik’s latest outburst, we share good company.

Who scored that fight in favor of Sachs & Warner?

Romain Wacziarg & Karen Horn Welch didn’t [UPDATE 1: See Wacziarg’s comments below.]:

Our cross-sectional results confirm recent criticisms of the SW findings by showing that they were sensitive to the chosen openness classification in the 1970-1989 period, and that they no longer hold for the 1990s. In the 1990s, a vast ma jority of the countries in our sample are classified as open, and a simple dichotomous indicator of openness no longer discriminates between slow and fast growing countries. Our findings suggest that researchers should exercise caution when using simple dichotomous policy indicators such as the SW dummy.

Gordon Hanson and Ann Harrison didn’t:

Although these studies typically show a positive relationship between trade reform and productivity growth, most are plagued by serious econometric and data problems. To illustrate the problems with this literature, we examine a popular measure of openness recently introduced by Sachs and Warner (1995). The evidence presented in this paper shows that their measure fails to establish a robust link between more open trade policies and long run growth…

Clearly, however, the Sachs and Warner measure captures many other aspects of openness than pure trade policy… The coefficients on all five factors which were used to construct the Sachs and Warner (“SW”) openness measure are reported in column (2). Out of all the five factors, only one is significant: whether or not the country had a socialist economic system. The results in column (2) seem to suggest that the factor driving statistical significance behind the composite measure is the market structure of the economy, not its trade policy orientation.

Sachs & Warner (1995) has nothing to do with the present Hufbauer et al. vs Rodrik debate, but I don’t think Rodrik did badly in that fight.

UPDATE 1: Romain Wacziarg comments below, noting that his paper actually debunks SW’s measure cross-sectionally but supports the SW dummy and growth relationship in a panel data, fixed effects setting. Admittedly, this boosts Sachs & Warner’s policy conclusion, but I don’t think it vindicates them from Rodrik & Rodriguez’s criticisms. Indeed, Wacziarg & Welch’s write: “We revisited the evidence on the cross-country effects of SW’s simple dichotomous indicator of outward orientation on economic growth, confirming the pitfalls of this indicator first underlined by RR.”

My point is not that the profession scores the debate in favor of Dani Rodrik in terms of policy conclusions (he makes his living as a dissenter), but that Rodriguez and Rodrik were right to argue that Sachs & Warner’s 1995 paper was not econometrically robust. Since no one seems to have refuted RR’s criticisms of the original article, it seems odd for Gary Hufbauer to invoke Sachs & Warner when facing a methodological criticism from Dani Rodrik.

UPDATE 2: Romain Wacziarg writes:

The cross-sectional part surely was fragile, due to the coarseness of the cross-sectional dummy variable. But they [Sachs and Warner] also had a couple of longitudinal regression of the kind
that Karen Welch and I ran more systematically. Those stand up well to the update, and to the Rodriguez and Rodrik critique.

RR did have good points on the methodology, and it’s a good thing to force the profession to work harder. But they also had a substantive point to make about the literature, which was that the growth gains from trade were either zero or not very large. Here I have to part ways with them. I still read the preponderance of the empirical evidence as supportive of large positive effects of openness.

I tend to agree with Prof Wacziarg on the substantive issues, but I’m still less fond of the Sachs & Warner index methodologically. Trade openness is dichotomous, really? Call me an Anderson & Neary kinda guy.

1 thought on “Sachs & Warner (1995), again

  1. Romain Wacziarg

    Thanks for citing my research. However you grossly misread what Karen Welch and I found. If you read a little further in the paper you will come across the following:
    “In contrast to the cross-sectional findings presented here, the results based on within-country variation suggest that over time the
    effects of increased policy openness within countries are positive, economically
    large, and statistically significant.”
    Those are much more reliable estimates because they control for every time-invariant country characteristics. The paper I wrote with Welch scores the debate in favor of Sachs and Warner rather than in favor of trade skeptics.

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