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



has also been shown that in the presence of within-industry firm heterogeneity, trade liberalization
causes more productive firms to expand at the expense of less efficient firms (which either shrink
or exit), thereby inducing additional efficiency gains. Moreover, trade and investment liberaliza-
tion may foster technology advancement and productivity growth in developing countries through
several channels, such as technology advancement embodied in imported capital goods and interme-
diate inputs, technology transfers accompanying foreign direct investment, learning-by-exporting
effects, etc.

In the last decade, a number of empirical works have resorted to firm and plant-level panel
data to see whether the predicted gains from trade liberalization have materialized in some recent
episodes of drastic trade reform in the developing world. Most of these studies find that trade reform
in developing countries was indeed accompanied by productivity growth, technology advancement,
falling mark-ups and a reshuffling of resources toward the more efficient firms, although in some
cases the evidence may fail to convince because of the hurdles involved in the methodology used
in these studies. This is true, in particular, for India, where in some cases studies using slightly
different methodologies find opposite results. However, aside from methodological issues, India
seems an exception with respect to other trade liberalizing developing countries, since most studies
find that the 1991 trade reform was in fact accompanied by a reduced productivity growth. One
explanation for this result is that India is still a heavily regulated economy, and hence the expected
benefits of industrial restructuring and of the trade-induced reallocation of resources are probably
smaller and will take longer to materialize.

Although the efficiency argument for trade liberalization has generally been accepted, the main
argument against trade reform in the developing countries that have opted for an import substi-
tution industrialization strategy has often been that trade liberalization would exacerbate income
inequality and hence deteriorate the conditions of the poor. In particular, concerns regarding higher
unemployment among workers displaced by the contraction of import competing sectors, greater
uncertainty and precariousness of job conditions, and the creation of new job opportunities only



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