SOME COUNTRIES PRODUCE SO MUCH MORE OUTPUT PER WORKER THAN OTHERS: Estimating the Effect of Social Infrastructure 2

i (1)
The second element of our measure of social infrastructure captures the extent to which a country is open to international trade. Policies toward international trade are a sensitive index of social infrastructure. Not only does the imposition of tariffs divert resources to the government, but tariffs, quotas, and other trade barriers create lucrative opportunities for private diversion. In addition, policies favoring free trade yield benefits associated with the trade itself. Trade with other countries yields benefits from specialization and facilitates the adoption of ideas and technologies from those countries. Our work does not attempt to distinguish between trade policies as measures of a country’s general infrastructure and the specific benefits that come from free trade itself.


Sachs and Warner (1995) have compiled an index that focuses on the openness of a country to trade with other countries. An important advantage of their variable is that it considers the time since a country adopted a more favorable social infrastructure. The Sachs-Warner index measures the fraction of years during the period 1950 to 1994 that the economy has been open and is measured on a [0,1] scale. A country is open if it satisfies all of the following criteria: (i) nontariff barriers cover less than 40 percent of trade, (ii) average tariff rates are less than 40 percent, (iii) any black market premium was less than 20 percent during the 1970s and 1980s, (iv) the country is not classified as socialist by Kornai (1992), and (v) the government does not monopolize major exports.

In most of the results that we present, we will impose (after testing) the restriction that the coefficients for these two proxies for social infrastructure are the same. Hence, we focus primarily on a single index of social infrastructure formed as the average of the GADP and openness measures.