Trade liberalization, competition and productivity growth – new evidence from Pakistani manufacturing firms
DOI:
https://doi.org/10.1956/jge.v9i3.292Keywords:
Trade liberalization, Productivity, Tariffs, Markups, PakistanAbstract
It is generally believed that a rise in foreign competition makes the industrial sector more efficient. By using a novel firm-level data set from a variety of industries in Pakistan, this paper revisits productivity-liberalization link, and investigates the effect of trade liberalization on competition and firm productivity. We find that productivity gains from reducing overall tariff rates are not obvious from a simple regression of total factor productivity on tariff rates; if there are any gains from reducing tariffs on intermediate goods, they are greatly counterbalanced by reduction in tariffs on final goods. There is evidence of an increase in competition following trade liberalization. In a majority of industries, there is reduction in returns to scale, indicating the existence of inflexible capacity constraints in these industries. Moreover, it offers evidence for the perception that gains from trade liberalization in the form of improvement in firm productivity have been greatly exaggerated.
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Bernard, Andrew; J. Bradford Jensen; Stephen J. Redding; and Peter K. Schott. 2007. "Firms in International Trade." Journal of Economic Perspectives 21, no. 3: 105-30.
Corden, Warner M. 1971. The Theory of Protection. Oxford: Oxford University Press.
Devarajan, Shantayanan, and Dani Rodrik. 1991. "Pro-competitive effects of trade reform: results from a CGE model of Cameroon." European Economic Review 35: 1157–84.
Domowitz, Ian; R. Glenn Hubbard; and Bruce C. Petersen. 1988. "Market structure and cyclical fluctuations in US manufacturing." The Review of Economics and Statistics 70, no. 1: 55-66.
Grossman, Gene M., and Elhanan Helpman. 1991. Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.
Hall, Robert E. 1988. "The relation between price and marginal cost in the US industry." Journal of Political Economy 96, no. 5: 921–47.
Harrison, Ann E. 1994. "Productivity, imperfect competition and trade reform: Theory and Evidence." Journal of International Economics 36: 53–73.
Hsiao, Cheng. 1990. Analysis of Panel Data. Cambridge University Press.
Krishna, Pravin, and Devashish Mitra. 1998. "Trade Liberalization, Market Discipline and Productivity Growth: New Evidence from India." Journal of Development Economics 56, no. 2: 447-62.
Krugman, Paul. 1986. "New Trade Theories and the Less-Developed Countries." Calvo, Guillermo. Debt, Stabilization and Development: Essays in Honor of Carlos Diaz-Alejandro. New York: Basil Blackwell.
Levinsohn, James, and Amil Petrin. 2003. "Estimating Production Functions using Inputs to control for Unobservables." Review of Economic Studies 70: 317-41.
Miyagiwa, Kaz, and Yuka Ohno. 1995. "Closing the Technology Gap under Protection." American Economic Review 85: 755-70.
Olley, G. Steven, and Ariel Pakes. 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry." Econometrica 64, no. 6: 1263–97.
Pursell, Garry; Ashraf Khan; and Saad Gulzar. 2011. "Pakistan's trade policies: Future Directions." International Growth Centre.
<http://www.theigc.org/sites/default/files/Pursell%20et%20al_Pakistans%20trade%20policies.pdf>
Roberts, Mark J., and James Tybout. 1991. "Size Rationalization and Trade Exposure in Developing Countries." Baldwin, Richard E. Empirical Studies of Commercial Policy. Chicago: U. Chicago Press for NBER.
Sachs, Jeffrey D., and Andrew Warner. 1995. "Economic Reform and the Process of Global Integration." Brookings Papers on Economic Activity: 1-118.
Tybout, James, and M. Daniel Westbrook. 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries." Journal of International Economics 39: 53-78.
Tybout, James. 1992. "Linking Trade and Productivity: New Research Directions." World Bank Economic Review 6: 189-212.
Wacziarg, Romain, and Karen Horn Welch. 2008. "Trade Liberalization and Growth: New Evidence." The World Bank Economic Review 22, no. 2: 187–231.
Wacziarg, Romain. 2001. "Measuring the Dynamic Gains from Trade." World Bank Economic Review 15, no. 3: 393-429.
World Bank. 2006. World Development Indicators. Washington D.C.: The World Bank.
< http://data.worldbank.org/indicator>
World Bank. 2006."Pakistan: Growth and Export Competitiveness." Report No. 35499 - PK.
<http://siteresources.worldbank.org/INTRANETTRADE/Resources/Pakistan_DTIS_Apr06.pdf>
World Trade Organization. 2002. Pakistan: Trade Policy Review.
< http://www.wto.org/english/tratop_e/tpr_e/tp185_e.htm>
World Trade Organization. 2009. Pakistan: The Tariff database, Integrated Database. <http://www.wto.org/english/thewto_e/countries_e/pakistan_e.htm >
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How to Cite
Liaqat, Z. (2013) “Trade liberalization, competition and productivity growth – new evidence from Pakistani manufacturing firms”, Journal of Global Economy, 9(3), pp. 219–246. doi: 10.1956/jge.v9i3.292.
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