Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?

growth in manufacturing after trade reform in Chile. Conversely, Harrison (1994) finds a signif-
icant productivity increase after trade liberalization in Cote d’Ivoire. In section 7, we show that
empirical works using a similar methodology find opposite results with regard to the effects of
the 1991 trade liberalization in India. In this section, we briefly review two recent studies which
will help us clarify the methodological hurdles involved in estimating the effect of trade reform on
productivity.

Tybout and Westbrook (1995) use plant-level panel data to study the efficiency gains induced by
the Mexico trade liberalization. Prior to 1985, Mexico was an inward-looking economy due to heavy
policies of trade protection.⁶ In 1985, the Mexican government announced its decision to join the
GATT and undertook major reforms leading to a reduction in tariffs by 45% and import licenses by
more than 75% within three years. Hence, the Mexican experience provides an interesting setting
to study the empirical relevance of trade-induced productivity gains in developing countries.

The methodology employed by Tybout and Westbrook allows them to disentangle three poten-
tial sources of productivity gains. The first derives from exploitation of scale economies. As shown
in Section 2, trade integration, by increasing the perceived product demand elasticity, causes firms
to loose market power and forces them down their average cost curves, thereby inducing scale
efficiency gains. The second source of productivity gains derives from market share reallocations
among plants with different levels of efficiency. As shown in Section 2, in the presence of sub-
stantial firm heterogeneity, market share reallocations can be a relevant source of trade-induced
productivity gains. Finally, the authors include a catch-all residual term which captures changes
in productivity not accounted for by scale effects or share reallocations, such as technical change,
learning-by-doing, externalities, capacity utilization, elimination of waste, managerial effort, and
so on. The main findings of Tybout and Westbrook are the following.

a) Scale efficiency effects. Most manufacturing sectors show increasing returns to scale, and for
the smallest plants in these industries returns to scale are often relevant (as high as 1.2). However,

⁶The data used by the authors are from Mexico’s Annual Industrial Survey and cover the period 1984 through
1990. The sample plants represent 80% of total output.

14

<<   12   13   14   15   16   17   18   >>

More intriguing information