Day 2: Research Session – Trade

Professor Andrés Rodríguez-Clare (University of California, Berkeley) and Professor Eric Verhoogen (Columbia University) chaired the Trade session. Honourable Francois Kanimba, Minister of Trade and Industry of Rwanda made opening remarks for the session where he underscored the importance of international trade on economic growth and productivity. Export led growth is important for many developing countries including Rwanda and trade can transform lives of millions of people around the globe.

Professor Amit Khandelwal (Associate Professor, Columbia Business School) presentation “Trade and Productivity: Some Evidence from India and China” focused on how with the removal of trade barriers, aggregate industry productivity rises as unproductive firms exit and resources reallocate to productive firms. Trade reforms can deliver larger-than-expected gains if it can reform or eliminate misallocating institutions. This is illustrated by the misallocation under the Multi-fiber Arrangement in China; when quotas ended in 2005, the market share of incumbents fell substantially -virtually the entire market share lost by incumbents was from State owned Enterprises in the apparel industry, while all of the gain by net entry was due to privately owned firms.

Trade liberalization and tariff reforms enhance within-firm productivity through improved access to intermediate inputs. Input tariff liberalization leads to imports of new inputs varieties which in turn lead to domestic product expansion. Topalova and Khandelwal (2011) find that 10 percentage point decline in input tariffs raises TFP by 4.8% in India. The results underscore the importance of input tariff liberalization in India’s case.

Professor Nico Voigtländer (UCLA and NBER) presentation on “Exporting and Plant-Level Efficiency Gains: It’s in the Measure” find that Trade liberalizations leads to within-plant efficiency gains; production costs drop by 15-25 percent and much of these gains are passed on to customers in the form of lower prices. In the study, authors use marginal production cost as an alternative efficiency measure as opposed to revenue productivity on a panel dataset of Chilean manufacturing plants (time period:1996-2005) to examine effects of (a) Export entry and (b) Export expansions of established exporters.

The study concludes that revenue productivity fails to capture or substantially underestimates efficiency gains. The most likely driver of efficiency gains are that export entry/expansion provides incentives to firms for investment on technology improvement. A main policy implication of the paper is the need to combine trade liberalization with incentives to that will spur investment in modern technology adoption by firms.

Professor Chris Woodruff (University of Warwick) presentation on “Trade and Productivity: Buyer Quality and Efficiency in the Bangladesh RMG Sector” demonstrate substantial heterogeneity in productivity across lines within plants using sewing operations production line level data of export oriented firms in the ready-made garment (RMG) sector, in Bangladesh. The buyer quality is measured by the average of the residuals across all product categories in which the buyer is active and seems to provides robust estimates.

The analysis shows that productivity is higher when firms produce for higher-end buyers, even so the same line of production. It is not clear however, if this can be attributed to learning.

The data analysis on measures of capital and labor quality is still being conducted. In addition, analysis of persistence effects on the production line will shed light on whether producing for a high-end buyer lead to higher productivity in subsequent production for lower-end buyers. The authors are also collecting data from factories in Pakistan, and plan to do so in other countries as well.

By Farria Naeem, Country Economist, IGC Bangladesh