Trade liberalisation, infrastructure, and firm performance

Policy brief Firms and Trade

  • 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.