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Trade Liberalization and Industrial Productivity: Evidence from Pakistan

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  • Ahmed, Gulzar
  • Arshad Khan, Muhammad
  • Afzal, Muhammad

Abstract

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.

Suggested Citation

  • Ahmed, Gulzar & Arshad Khan, Muhammad & Afzal, Muhammad, 2015. "Trade Liberalization and Industrial Productivity: Evidence from Pakistan," MPRA Paper 70744, University Library of Munich, Germany, revised 15 Mar 2016.
  • Handle: RePEc:pra:mprapa:70744
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade Liberalization; Endogeneity and Production Function; Industrial Panel Data;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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