industries covering all plants in the greater Istanbul area and spanning the years 1983-1986. Eight
of the ten industries saw a dramatic fall in protection after trade reform. The labor demand
elasticity is estimated for each of the ten industries separately, including firm-specific dummies
to control for firm heterogeneity. The main result is that, although most elasticities are precisely
estimated and fall in a reasonable range, estimates of the changes in labor demand elasticities are
small in magnitude and largely insignificant.24
The failure to reject the nul of no changes in labor demand elasticities is somewhat surprising,
since previous studies using the same data (e.g., Levinsohn, 1993) strongly suggest that trade
liberalization in Turkey led to substantial increases in product-market demand elasticities. From
(21) we know that higher product demand elasticities should have translated into higher labor
demand elasticities. One possible explanation for this contradictory evidence is that labor demand
decisions by firms are sub ject to several frictions, so that it takes time before changes in product
demand elasticities lead to observable changes in labor demand elasticities.
7 Evidence on the Effects of Trade Reform in India
7.1 Salient aspects of trade and investment reforms
Until the late eighties India’s economic system was highly regulated, so much to lead some com-
mentators to lump (erroneously, according to Basu and Pattanaik, 1997, p.123) India together with
Russia and China as examples of centrally planned economies. In June 1991, following a balance of
payment crisis, a newly elected government manifested its willingness to undertake deep structural
reforms and introduced drastic policy changes in the subsequent years. The main features of these
policy changes can be summarized as follows.
The trade policy regime changed abruptly and dramatically. Prior to the reform, it was one
of the world’s most regulated and protectionist trade regime, characterized by severe quantitative
24Fajnzylber and Maloney (2001) use plant-level panel data for Chile, Colombia and Mexico across their periods
of reform to estimate labor demand elasticities in these countries. Their results show little evidence of structural
breaks after trade reform in these countries, and of trade-induced increases in labor demand elasticities.
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