This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets.Keywords: Export diversification, growth volatility, trade openness JEL Classification: F15, F43, O24 Non-Technical SummaryWhile it is widely believed that trade openness is, under suitable conditions, positively associated with growth outcomes (Frankel and Romer 1999), the link between openness and growth volatility is less well understood. As trade integration deepens, economies are naturally more exposed to external shocks. However, does this automatically imply that more open economies must experience greater growth volatility, or are there factors that may condition whether the larger exposure translates into a more volatile growth path? Despite an extensive existing literature on the subject, there is no clear consensus to date. This paper seeks to contribute to this line of research and thus proceeds by asking two questions: first, does the effect of trade openness on growth volatility vary with the degree of concentration of a country's export basket? Second, if such conditioning exists, is there a level-in terms of a given export concentration measure-where, for the average country, the total effect of trade openness on growth volatility changes from negative to positive?Our empirical strategy begins with the computation of a variety of export concentration indicators, which we use as measures of the extent of export concentration in any given country, across both products and markets. We then utilize these measures to explore the relationship between concentration, trade openness, and volatility, while controlling for important additional sources of income volatility. We also obtain standard errors for the joint effect of the openness indicator and its interaction with concentration, and establish confidence-bound threshold values whereby the total effect of the openness variable on growth volatility switches sign. One major empirical concern is the possible endogeneity in the link between growth volatility and trade openness. While we have postulated a direct effect stemming from openness to volatility, we are aware that the converse is also possible, namely that trade policy responds to an increase in growth volatility. Our preferred choice of estimator to deal with the likely (weak) endogeneity in the relationship is the system GMM procedure proposed by (Arellano and Bover 1995; Blundell and Bond 1998); as an additional robustness check, however, we also explicitly control for reverse causality in the openness variable via the explicit incorporation of predicted trade flows (Frankel and Romer 1999) as an exogenous instrument.With regard to the first ques...

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

The theoretical discussion on globalization has suggested that there are linkages between democracy and trade, although the direction of influence is less certain. Formal empirical studies remain scarce, and have often focused on the question of whether democratic regimes influence trade policy, as opposed to the actual relationship between democracy and trade. This paper seeks to answer the question, "Do democracies trade more?" by applying the gravity equation to a large dataset of bilateral trade data for the period 1948-1999, while taking into account the role of democracy. It finds that democracy has a positive effect on trade flows, but only after controlling for trade pair heterogeneity. In addition, it makes the case for studies of this nature to draw a distinction between trade flows in the pre-and post-1990s period of rapid democratization as well as between developed and developing countries.Keywords: Democracy, trade, gravity model JEL Classification: F13, P51 * Centre College. Emails: jessica.decker@centre.edu and jamus.lim@centre.edu (corresponding author). We thank Eileen Brooks, Solange Gouvea, Kay Pommerenke, and two anonymous referees for very helpful tips and suggestions; naturally, we absolve them from any errors and omissions. We have benefited from financial support from Faculty Development Committee, Centre College (Decker) and the Graduate Division, University of California, Santa Cruz (Lim).The crossroads oif trade are the meeting place of ideas, the attrition ground of rival customs and beliefs; diversities beget conflict, comparison, thought; superstitions cancel one anogther, and reason begins.