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Productivity matters for trade policy : theory and evidence

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  • Karacaovali, Baybars

Abstract

There is a growing literature that investigates the effect of trade liberalization on productivity. Nearly all such studies assume that trade policy is determined independently of productivity, hence it is exogenous. The author shows that this assumption is not valid in general, both theoretically and empirically, and that researchers may be underestimating the positive effect of liberalization on productivity when they do not account for the endogeneity bias. On the theory side, he demonstrates that under a standard political economy model of trade protection, productivity directly influences tariffs. Moreover, this productivity-tariff relationship partly determines the extent of liberalization across sectors even in the presence of a large exogenous unilateral liberalization shock that affects all sectors. The link between productivity and tariffs is maintained after the author includes in his political economy model a learning-by-doing motive of protection, which also serves as the source of liberalization. On the empirical side, he examines total factor productivity (TFP) estimates obtained at the firm level for Colombia between 1983 and 1998, and finds that more productive sectors receive more protection within this period. In estimating the effect of productivity on tariffs, he controls for the endogeneity of the two main right-hand-side variables-the inverse import penetration to import demand elasticity ratio and productivity-by using materials prices, the capital to output ratio, a measure of scale economies, and the TFP of the upstream industries as robust instruments. The author also accounts for the large trade liberalization between 1990 and 1992, and finds that the sectors with a higher productivity gain are liberalized less. Finally, he illustrates a system of equations estimation and shows that the positive impact of liberalization on productivity grows stronger when corrected for the endogeneity bias.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3925.

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Date of creation: 01 May 2006
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Handle: RePEc:wbk:wbrwps:3925

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Keywords: Economic Theory&Research; Free Trade; Political Economy; Trade Policy; Trade Law;

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Citations

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Cited by:
  1. Altomonte Carlo & Barattieri Alessandro & Rungi Armando, 2014. "Import Penetration, Intermediate Inputs and Productivity: Evidence from Italian Firms," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 45-66.
  2. Jørn Rattsø & Torfinn Harding, 2009. "Industrial labor productivities and tariffs in South Africa: Identification based on multilateral liberalization reform," Working Paper Series 10309, Department of Economics, Norwegian University of Science and Technology.
  3. Langenmayr, Dominika & Haufler, Andreas & Bauer, Christian J., 2012. "Should tax policy favor high- or low-productivity firms?," Discussion Papers in Economics 14277, University of Munich, Department of Economics.
  4. Paz, Lourenco, 2012. "The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case," MPRA Paper 38858, University Library of Munich, Germany.
  5. Paz, Lourenco, 2012. "Trade liberalization and the inter-industry wage premia: the missing role of productivity," MPRA Paper 39024, University Library of Munich, Germany.
  6. Cruz, Moritz, 2008. "Can Free Trade Guarantee Gains from Trade?," Working Paper Series RP2008/97, World Institute for Development Economic Research (UNU-WIDER).
  7. Lourenco S. Paz, 2013. "Trade liberalization and inter-industry productivity spillovers: a dynamic spatial panel approach," Economics Bulletin, AccessEcon, vol. 33(3), pages 2379-2393.
  8. Paz, Lourenço S., 2014. "The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case," Journal of International Economics, Elsevier, vol. 92(2), pages 330-348.
  9. Maria Bas & Antoine Berthou, 2013. "Does Input-Trade Liberalization Affect Firms' Foreign Technology Choice?," Working Papers 2013-11, CEPII research center.
  10. Paz, Lourenco, 2012. "Trade liberalization and inter-industry productivity spillovers: an analysis of the 1989-1998 Brazilian trade liberalization episode," MPRA Paper 38859, University Library of Munich, Germany.
  11. Levent Celik & Bilgehan Karabay & John McLaren, 2011. "Trade Policy Making in a Model of Legislative Bargaining," NBER Working Papers 17262, National Bureau of Economic Research, Inc.

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