This paper offers a new interpretation of the connection between openness and good governance. Assuming that corruption and bad governance drive out international trade and investment more than domestic trade and investment, a naturally more open economy' as determined by its size and geography would devote more resources to building good institutions and would display lower corruption in equilibrium. In data, naturally more open economies' do exhibit less corruption even after taking into account their levels of development. Residual openness' which potentially includes trade policies is found not to be important once natural openness' is accounted for. Moreover, naturally more open economies' also tend to pay better civil servant salaries relative to their private sector alternatives indicative of the marginal benefit of good governance in a society's revealed preference. These patterns are consistent with the conceptual model.
The author offers a possibly new interpretation of the connection between openness and good governance, with a conceptual model and some empirical evidence. Assuming that corruption and bad governance reduce international trade and investment more than domestic trade and investment, a"naturally more open economy"-as determined by its size and geography-would devote more resources to building good institutions and would display less corruption in equilibrium. How is"natural openness"defined? By size, geography, and language. France would be more naturally open than Argentina because Argentina is more remote. Ability to speak English facilitates international trade. A country with a long coast tends to be more open than a landlocked country. In the data,"naturallymore open economies"do show less corruption even after their level of development is taken into account."Residual openness"-which could include trade policies-is not important once"natural openness"is accounted for. Moreover,"naturally more open economies"also tend to pay civil servants salaries that are more competitive with those of their private sector counterparts. One implication of this research is that globalization may affect governance: as globalization deepens, the"natural openness"of all countries increases. This raises the opportunity cost of tolerating a given level of corruption and could provide new impetus for countries to fight corruption. These patterns are consistent with the conceptual model.
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