Effects of Foreign Trade Liberalization on the Productivity of Industrial Sectors in Turkey

This paper investigates the effects of foreign trade liberalization of Turkey after 1980 on the productivity of industrial sectors. The relationship is tested using panel data of twenty-eight ISIC three-digit industrial sectors for the 1974–1994 period. Two different regressions are run. The first one decomposes manufacturing output growth into its components—that is, factor use, markups, economies of scale effects, and productivity changes—and tests whether there are any shifts in one of these components after trade liberalization. The results of the analysis show that, on the basis of the available evidence, we can say that there is a positive shift in productivity and a negative shift in industrial markups after trade liberalization. Moreover, returns to scale is decreased after trade liberalization. Whereas before 1984, increasing returns to scale was the rule, after 1984, decreasing returns to scale characterizes the Turkish manufacturing industry as a whole. The second regression tries to explain price–cost margins with import penetration, capital/output ratio, and the Herfindahl index—that is, a measure of industrial concentration. All of the explanatory variables seem to have a significant effect on price–cost margins. Import penetration has a positive effect on price–cost margins, contrary to commonsense predictions. The capital/output ratio affects price–cost margins slightly negatively. The Herfindahl index is the most important factor affecting price–cost margins. As concentration in the industry increases, price–cost margins increase more than proportionately.