THE LINK BETWEEN INCREASED TRADE OPENNESS AND THE TERMS OF TRADE - AN EMPIRICAL-INVESTIGATION

Despite the fairly widespread move towards more open trade policies in developing countries relatively little attention has been paid to the effect of these policies on the terms of trade. Using a large sample of countries this paper tries to assess empirically the validity of the ''small country assumption'' which underlies the Washington consensus on development strategies. Our evidence suggests that there is a sizable group of countries (LDCs and non-LDCs) for which the assumption of exogenous traded-goods prices can be rejected. One implication is that terms of trade considerations should be included in the assessment of trade-liberalization policies. These effects might rise considerably when several countries liberalize simultaneously.