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Trade Policy, Trade Volumes and Plant-Level Productivity in Colombian Manufacturing Industries

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Author Info
Ana Fernandes (Economic Growth Center, Yale University)

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Abstract

This paper offers new insights on a central question in trade and development economics: does increased exposure to foreign competition generate gains in plant productivity? We find that it does. We examine Colombian trade policy from 1977 to 1991, a period during which trade liberalization alternates with increased trade protection in varied ways across industries, to investigate the link between trade policy and plant productivity. Using a rich panel of manufacturing plants, we obtain production function estimates separately across industries that are consistent in face of the simultaneity between input demands and productivity. These estimates are used to derive plant-level time-varying productivity measures for which a systematic component related to trade policy is identified. We find a strong negative impact of nominal tariffs on plant productivity controlling for observed and unobserved plant characteristics and industry heterogeneity. The use of lagged tariffs and the evidence on the political economy of tariff determination in Colombia allow us to argue that the negative impact of tariffs is unlikely to reflect the endogeneity of protection. Plant exit plays a minor role in generating productivity gains in face of lower trade protection. Also, accounting for variation in the Colombian peso's real exchange rate does not weaken the main findings. The negative impact of trade protection on productivity is stronger for large plants relative to small plants, as measured by employment and market shares. The negative impact of trade protection on productivity is stronger for plants in less competitive industries according to Herfindahl indexes and turnover rates. The main findings are robust to the use of effective rates of protection and import penetration ratios as measures of trade protection and openness. Finally, we also find evidence of a negative impact of trade protection on the rate of growth of plant productivity. Journal of Economic Literature Classification Numbers: F13, D24, C14, O54.

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Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 847.

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Length: 72 pages
Date of creation: Jul 2002
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Handle: RePEc:egc:wpaper:847

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Keywords: Simultaneity and Production Functions Trade Policy Productivity Colombian Manufacturing Endogeneity of Protection

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References listed on IDEAS
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  1. Krishna, Pravin & Mitra, Devashish, 1998. "Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of Development Economics, Elsevier, vol. 56(2), pages 447-462, August. [Downloadable!] (restricted)
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  2. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November. [Downloadable!] (restricted)
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  6. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April. [Downloadable!] (restricted)
  7. W. M. Corden, 1966. "The Structure of a Tariff System and the Effective Protective Rate," Journal of Political Economy, University of Chicago Press, vol. 74, pages 221. [Downloadable!] (restricted)
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  9. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October. [Downloadable!] (restricted)
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  13. Pinelopi K. Goldberg & Nina Pavcnik, 2001. "Trade Protection and Wages: Evidence from the Colombian Trade Reforms," NBER Working Papers 8575, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  15. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
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  16. Goh, Ai-Ting, 2000. "Opportunity cost, trade policies and the efficiency of firms," Journal of Development Economics, Elsevier, vol. 62(2), pages 363-383, August. [Downloadable!] (restricted)
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  18. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Kim, Euysung, 2000. "Trade liberalization and productivity growth in Korean manufacturing industries: price protection, market power, and scale efficiency," Journal of Development Economics, Elsevier, vol. 62(1), pages 55-83, June. [Downloadable!] (restricted)
  20. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August. [Downloadable!] (restricted)
  21. Harrison, Ann, 1996. "Openness and growth: A time-series, cross-country analysis for developing countries," Journal of Development Economics, Elsevier, vol. 48(2), pages 419-447, March. [Downloadable!] (restricted)
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  22. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-98, March. [Downloadable!] (restricted)
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  23. Pavcnik, Nina, 2002. "Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 245-76, January.
  24. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February. [Downloadable!] (restricted)
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  26. Vousden, Neil & Campbell, Neil, 1994. "The organizational cost of protection," Journal of International Economics, Elsevier, vol. 37(3-4), pages 219-238, November. [Downloadable!] (restricted)
  27. Sofronis K. Clerides & Saul Lach & James R. Tybout, 1998. "Is Learning By Exporting Important? Micro-Dynamic Evidence From Colombia, Mexico, And Morocco," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 903-947, August. [Downloadable!] (restricted)
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  28. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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  29. Ana Fernandes, 2002. "Trade Policy, Trade Volumes and Plant-Level Productivity in Colombian Manufacturing Industries," Working Papers 847, Economic Growth Center, Yale University. [Downloadable!]
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