Effect of Import Liberalization on Industrial Productivity


There are reasons to expect a favorable effect of import liberalization on industrial productivity. This is expected to occur through several channels: (a) Import liberalization will provide to industrial firms greater and cheaper access to imported capital goods and intermediate goods (embodying advanced technology), which will enable the firms improve their productivity performance; (b) Greater availability of imported intermediate goods will enable the firms to exploit better the productivity enhancing potential of
imported technology; (c) The increased competitive pressure on industrial units in a liberalized import regime will force them to be more efficient in the use of resources (which can be achieved through better organization of production, improved managerial efficiency, more effective utilization of labour, better capacity utilization, etc.); (d) The increased competitive pressure coupled with expanded opportunities for importing technology and capital goods will bring greater technological dynamism in industrial firms; (e) As the competitive business environment forces inefficient firms to close
down, the average level of efficiency of various industries should improve; (f) Greater access to imported inputs and a more realistic exchange rate associated with a liberalized trade regime would enable industrial firms compete more effectively in export markets. This would allow them to increase their sales and reap economies of scale with concomitant gains in productivity.

Evidently, there are persuasive theoretical arguments for contemplating a positive effect of import liberalization on industrial productivity. However, this view or hypothesis does not have a strong empirical support. There have been a number of empirical studies for developing countries, including the countries of Asia, in which econometric models have been estimated to assess the effect of import liberalization on industrial productivity. Some of them have found a significant favourable effect of import liberalization on industrial productivity. But, some have found no significant effect, while some others have found an adverse effect of import liberalization on industrial productivity. Thus, on the whole, the empirical evidence on the relationship between import liberalization and industrial productivity in developing countries is mixed and no definite conclusion can be drawn. As regards Indian industry, there are two recent studies, which have examined the effect of economic reforms on industrial productivity. These are by Krishna and Mitra (1998) and Balakrishnan, Pushpangadan and Suresh Babu (2000). Both studies have used firm- level data taken from Centre for Monitoring Indian Economy (CMIE) database. Also, there is similarity in the method of econometric analysis applied in the two studies. But, the studies come up with conflicting results. Krishna and Mitra find evidence of a significant favourable effect of reforms on indus trial productivity. Balakrishanan et al., on the other hand, find an adverse effect of economic reforms on industrial productivity.

One serious limitation of both studies is that they have not used explicit trade liberalization variables in the econometric model estimated. Rather, a dummy variable approach has been taken to distinguish between the pre- and post-reform periods. This study differs from the studies undertaken by Krishna and Mitra (1998) and Balakrishnan, et al. (2000) in several respects. The analysis of productivity is undertaken at the industry- level rather than at the firm- level. The source of data is also different.More important, an attempt is made here to incorporate explicitly variables representing trade liberalization in the econometric model estimated.

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