The elusive productivity effect of trade liberalization in the manufacturing industries of emerging economies

Abstract

Using a model that admits variable returns and imperfect competition, we investigate the impact on total factor productivity of trade liberalization in six emerging economies. Regressions based on panel data for 28 three-digit manufacturing industries show that productivity growth is insensitive to tariff reduction. These results are at variance with country-specific studies which, using firm-level data, generally find a positive association between liberalization and productivity growth. While aggregation effects may matter, our results can also be explained thusly: significant productivity gains by latecomers via technological assimilation do take time and require appropriate sequencing of reforms of trade and industrial policies.