There exists a positive correlation between an economy's exposure to international trade and the size of its government. The correlation holds for most measures of government spending, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. One explanation is that government spending plays a risk-reducing role in economies exposed to a significant amount of external risk. The paper provides a range of evidence consistent with this hypothesis. In particular, the relationship between openness and government size is strongest when terms-of-trade risk is highest.

Why do governments so often fail to adopt policies which economists consider to be efficiency-enhancing? Our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform. We show that there is a bias towards the status quo (and hence against efficiency-enhancing reforms) whenever some of the individual gainers and losers from reform cannot be identified beforehand. There are reforms which, once adopted, will receive adequate political support but would have failed to carry the day ex ante. The argument does not rely on risk aversion, irrationality, or hysteresis due to sunk costs.

This paper examines short-term volatility in the real effective exchange rates of industrial countries and its impact on their imports. It yields three conclusions. First, volatility has not diminished as markets have gained experience with floating exchange rates; the trend appears to be in the opposite direction for some countries. Second, exposure to short-term volatility has differed among countries; Japan and Sweden have experienced much more than most other industrial countries. Third, volatility appears to depress the volume of international trade. This third finding is consistent with results reported by Cushman and by Akhtar and Hilton and challenges earlier findings by Hooper and Kohlhagen.

In Search of the Holy Grail: Policy Convergence, Experimentation, and Economic Performance by Sharun W. Mukand and Dani Rodrik. Published in volume 95, issue 1, pages 374-383 of American Economic Review, March 2005

Several influential commentators have suggested recently that democratization in developing countries produces political instability, ethnic conflict, and poor economic outcomes. For instance, Robert D. Kaplan (2000) states that “If a society is not in reasonable health, democracy can be not only risky but disastrous” (p. 62). Fareed Zakaria (2003) points out that “although democracy has in many ways opened up African politics and brought people liberty, it has also produced a degree of chaos and instability that has actually made corruption and lawlessness worse in many countries.” Amy Chua (2003) argues that: “... in the numerous countries around the world with a market-dominant minority, ... [a]dding democracy to markets has been a recipe for insability, upheaval, and ethnic conflagration.” (p. 124).