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Trade Liberalization and Industrial Productivity: Evidence from Pakistan

Listed author(s):
  • Ahmed, Gulzar
  • Arshad Khan, Muhammad
  • Afzal, Muhammad
Registered author(s):

    This study examines the impact of trade liberalization on industrial productivity for a panel of twenty seven 3-digit manufacturing industries in Pakistan over the period 1980-2006. Following Olley and Pack’s (1996) Control Function Approach (CFA) we deal with the endogeneity arises from unobserved productivity shocks. Using a variant of Cobb-Douglas production function, in the first step we estimate output elasticities. We find positive output elasticities with respect to labor, capital and raw materials for the pre-trade liberalization period (1981-1995) and post-trade liberalization period (1996-2006). For the pre-liberalization, we observed positive output elasticity with respect to energy, while it turns out to be negative in the post-liberalization period; probably due to energy crisis in Pakistan. In the second stage, we estimate total factor productivity (TFP) and examine the impact of trade liberalization on TFP for pre-and post-trade liberalization regimes. The results reveal that trade liberalization proxied by excise duty has positive but negligible impact on TFP in the pre-as well as post-liberalization periods. On the other hand, effective rate of protection exerts large negative impact on TFP in the post-liberalization than the pre-liberalization period.

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    File URL: https://mpra.ub.uni-muenchen.de/70744/1/MPRA_paper_70744.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 70744.

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    Date of creation: 15 Aug 2015
    Date of revision: 15 Mar 2016
    Handle: RePEc:pra:mprapa:70744
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