Trade liberalisation, infrastructure, and firm performance
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- Starting in 1997, Ethiopia implemented large investments in infrastructure with the road sector development programme. This followed a wave of trade reforms aimed at reducing tariff barriers that occurred between 1996 and 2003.
- This brief analyses the complementarities between trade and infrastructure reforms, asking whether improvements in the quality of roads magnifies the effects of trade liberalisation on firms performance.
- The authors find strong complementarity between the effects of a reduction in input tariffs and road infrastructure, highlighting that trade liberalisation can boost firm productivity only if firms have access to good roads.
- For a majority of observations in the data (67%), a fall in the input tariff is associated with an increase in firm productivity. However, for a majority of towns, a reduction in tariffs would not result in an increase in productivity for firms located there due to lack of road infrastructure.
- The authors provide a series of policy recommendations on how to best reap the rewards of globalisation through improving infrastructure.