IDEAS home Printed from https://ideas.repec.org/p/red/sed004/40.html
   My bibliography  Save this paper

The Unequal Effects of Trade Liberalization: Theory and Evidence from India

Author

Listed:
  • F. Zilibotti
  • P. Aghion
  • R. Burgess

Abstract

This paper focuses on the effects of a recent episode of trade liberalization in India. India underwent a massive reform in 1991 which involved slashing tariffs and opening up different industrial sectors to foreign direct investment. This episode, which is described in detail in a section of the paper, represents, for its size and impact, an attractive experiment to assess the validity of the theory. More precisely, we construct a three-dimensional panel for the period 1970 to 1996 using "Annual Survey of Industries" (ASI) data with variations over 3-digit industry, state and time. The available data include value added, capital, labor and profits for each industry-state-time observation. We use a measure of output per worker in the period just before liberalization (relative to the most productive state-industry observation in the same year) as a proxy of the distance to frontier for a particular 3-digit industry. We interact this variable with a reform measure which is zero before 1991 and takes on a value of one thereafter to test whether the distance to frontier prior to reform influences the post-reform performance. We first document the effects of the reform on labor productivity, and then consider separately the effects on total factor productivity, profitability employment and investments. This provides a test of the first prediction of the theory, i.e., that firms closer to the frontier respond more to the threat of entry introduced by liberalization. Second, we consider state-specific labor market regulations. To this aim, we use a measure of the direction of labor regulation constructed by Besley and Burgess (2002), which coded state amendments to the Industrial Dispute Act as pro-labor, neutral or pro-capital. The level of this variable in 1991, which captures the relative bargaining powers of workers and employers at the moment of the reform, is then interacted with the dummy for the reform and used as an explanatory variable for separate regressions for labor productivity, TFP etc.. The estimated coefficient on this interaction term provides an inference on whether labor regulations mattered in determining the effect of the reform on state industrial performances. Finally, we consider the three way interaction between distance to frontier, labor regulation and reform to examine whether the impact of regulation on industrial performance is larger for industries that are closer to the world frontier. The regression analysis show that (i) state-industries that are closer to the technological frontier experienced larger increases in real manufacturing output, labor productivity, TFP and rents (profits) in the post-reform period. (ii) pro-worker labor regulations have a negative effect on the growth of the same variables, and this effect is strengthened by liberalization. Both results hold true after controlling for state, industry and state-industry fixed effects plus time dummies. Robustness checks include adding controls for state dummies interacted with the dummy for reform to show that the results are due, as the theory suggests, to variations within industries. Also, adding industry-specific time trends to account for different convergence patterns across industries does not change the results.

Suggested Citation

  • F. Zilibotti & P. Aghion & R. Burgess, 2004. "The Unequal Effects of Trade Liberalization: Theory and Evidence from India," 2004 Meeting Papers 40, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:40
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sivadasan, Jagadeesh & Slemrod, Joel, 2008. "Tax law changes, income-shifting and measured wage inequality: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2199-2224, October.
    2. Roberto Alvarez & Ricardo Lopez, 2008. "Trade Liberalization and Industry Dynamics: A Difference in Difference Approach," Caepr Working Papers 2008-009, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    3. Philippe Aghion & Evguenia Bessonova, 2006. "On Entry and Growth: Theory and Evidence," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 259-278.
    4. Burgess, Robin & Venables, Anthony J., 2004. "Toward a microeconomics of growth," Policy Research Working Paper Series 3257, The World Bank.
    5. Lall, Somik V. & Mengistae, Taye, 2005. "The impact of business environment and economic geography on plant-level productivity : an analysis of Indian industry," Policy Research Working Paper Series 3664, The World Bank.
    6. Fabio Schiantarelli, 2005. "Product Market Regulation and Macroeconomic Performance: A Review of Cross Country Evidence," Boston College Working Papers in Economics 623, Boston College Department of Economics, revised 04 Aug 2008.
    7. Eli Berman & Rohini Somanathan & Hong W. Tan, 2010. "Is Skill Biased Technological Change Here Yet? Evidence from India Manufacturing in the 1990s," NBER Chapters,in: Contributions in Memory of Zvi Griliches, pages 299-321 National Bureau of Economic Research, Inc.
    8. Rodrik, Dani, 2005. "Growth Strategies," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 14, pages 967-1014 Elsevier.
    9. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2009. "The Effects of Entry on Incumbent Innovation and Productivity," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 20-32, February.
    10. Marie Daumal, 2013. "The Impact of Trade Openness on Regional Inequality: The Cases of India and Brazil," The International Trade Journal, Taylor & Francis Journals, vol. 27(3), pages 243-280, August.
    11. Utsav Kumar & Prachi Mishra, 2008. "Trade Liberalization and Wage Inequality: Evidence from India," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 291-311, May.
    12. Petia Topalova & Amit Khandelwal, 2011. "Trade Liberalization and Firm Productivity: The Case of India," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 995-1009, August.
    13. Klara Sabirianova Peter & Jan Svejnar & Katherine Terrell, 2012. "Foreign Investment, Corporate Ownership, and Development: Are Firms in Emerging Markets Catching Up to the World Standard?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 981-999, November.
    14. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
    15. Puja Vasudeva Dutta, 2004. "Trade Protection and Inter-industry Wages in India," PRUS Working Papers 27, Poverty Research Unit at Sussex, University of Sussex.
    16. Jérôme Vandenbussche & Philippe Aghion & Costas Meghir, 2006. "Growth, distance to frontier and composition of human capital," Journal of Economic Growth, Springer, vol. 11(2), pages 97-127, June.
    17. Tushar Poddar, 2004. "Domestic Competition Spurs Exports; The Indian Example," IMF Working Papers 04/173, International Monetary Fund.
    18. Erkan Erdem & James Tybout, 2003. "Trade Policy and Industrial Sector Responses: Using Evolutionary Models to Interpret the Evidence," NBER Working Papers 9947, National Bureau of Economic Research, Inc.
    19. Sudip Ranjan Basu, 2007. "Comparing China and India: Is dividend of economic reforms polarized?," IHEID Working Papers 01-2007, Economics Section, The Graduate Institute of International Studies.
    20. Rajesh Natarajan & Malathy Duraisamy, 2008. "Efficiency and productivity in the Indian unorganized manufacturing sector: did reforms matter?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 55(4), pages 373-399, December.
    21. Sumon Kumar Bhaumik & Shubhashis Gangopadhyay & Shagun Krishnan, 2006. "Reforms, Entry and Productivity: Some Evidence from the Indian Manufacturing Sector," William Davidson Institute Working Papers Series 822, William Davidson Institute at the University of Michigan.

    More about this item

    Keywords

    reform; distance to frontier;

    JEL classification:

    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed004:40. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.