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# B. Trade Reform, Productivity and Output Growth

3. The two key variables that can have a major influence on growth include the availability of resources and the government policies that affect the efficiency of resource use. Both variables can determine the level and the rate of growth of output.2 In general, the level of investment declined or remained stagnant in the trade adjusting countries in the 1980s during the adjustment period; this pause in investment activity is well recognized by now and is known to be related to uncertainty arising from changes in policiesY Any output growth that took place, therefore, had to come from efficiency improvements. There are several channels through which trade reform can improve (finn-level) efficiency and, thus, oetput gro .. ih. First, import competition can force domestic finms to increase productivity 4 Domestic firms can raise productivity by increasmg scale-efficiency (producing at minimm efficient scale) and by improving technical efficiency (ahieuving the maximum possible output from a given bundle of inputs). In effect, import competition changes the structure of the market and, thus, its performance. Second, trade liberalization can also generate beneficial externalities. If exteal economies, such as technology diffusion, can be transmitted world-wide and are not nation specific, then trade liberalization could benefit technological developments in the adjusting countriesY. The following sections evaluate the impact of trade liberaization on productivity and GDP growth for nine trade adjusfing countries.

4. Productivity Gains. Ideally, data on factor productivity are required at the finm level to assess the linhge between trade reform and productivity;- they are, however, not available for the group of adjusters reviewed here. This paper uses data on labor productivity at the aggrege level. Table I reports the annual data on real output per worker in the m in sector for five trade adjusters for the period 1978-86 (Colombia, Indonesia, Mexico, Pakistan and Turkey).<sup>2</sup> ' For the five adjusters as a group annual output per worker increased from 103 in 1978-82 to 130 in 198346 (1980= 100).

- a' For a survey, see W.R. Easterly and D.L. Wetzel, Policy Detenninants of Growth: Survey of Theorv and Evidence, PRE WP 343, The World Bank, December '989; R.J. Barro, A crosscountry studv of rowth. savings. and government, NBER Working Paper No. 2855 (Cambridge, MA, 1989).

- 3 See W.H. Branson and S. Schwartz, 'Investment Efficiency and the Financial Sector," August 1989, prepared for the Rerort on Ad& ent Lending II.

- 4 The efficiency resource costs associated with restrictive trade policies, of course, would be less when trade restrictions are not binding, e.g., smuggling can continue to provide competition to local firms despite import restrictions.

- 5 For an altemative argument, see F. Stewart and E. Ghani, "Do Externalities Mater for Development?," World Development. Pergamon Press, May 1991.

- ! For example, see J. Tybout, J. de Melo and V. Corbo, The Effects of Trade Reforms on Scale and Technical Efficiency: New evidence from Chile, PRE Working Paper No. 481, 1990.

- 71 Time series data on capital productivity for the tade adjusting counties are not available.