Import Liberalization, Productivity and Exports Mustapha Nabli World Bank November 25, 2004

Import Liberalization  Consequences of the wave of liberalization in developing countries  Reduces costs of producing for export  Reduces the indirect cost of exporting via real exchange rate effects  Helps stimulate productivity growth  Makes many exporting activities profitable & helps diversify exports

Dramatic Liberalization in Developing Countries

Liberalization: Not just tariffs  Tariffs are just one part of the trade regime– need to consider others  Foreign exchange rate overvaluation– another major tax on exports– was also reduced substantially  Non-tariff barriers were also reduced sharply.  Clearly, there has been more liberalization than indicated just by tariffs

Direct cost reductions  Reductions in protection reduce the cost of intermediate inputs  These reductions can be large, and are much more important for manufactures than for agriculture and resources  In principle, duty exemptions/free trade areas/duty drawbacks can also reduce these costs –But administration costs high; create incentives for corruption; frequently unsuccessful

Libn has reduced the burden on exports of manufactures: China

Real Exchange Rate Overvaln  Protection to imports raises the price of nontraded goods  This effect seems to be large –10% tariff raises exporters’ costs by about 7%  Duty exemptions/drawbacks do not overcome these costs  This effect discourages manufactured exports & increases dependence on commodities

Trade-Growth Linkages  There is strong evidence that trade liberalization stimulates growth  Lowers the costs of capital goods, and hence increases the country’s desired capital stock  More importantly, increased trade helps facilitate technology transfer, and hence raises productivity

The role of trade reform –Trade policy reform seems necessary to ensure sustained growth and diversification –But it is not a magic bullet. Other policy reforms eg infrastructure, education, needed to ensure success –However, there are essentially no cases of sustained growth without trade expansion

Export diversification is a key effect of growth & liberalization  Growth helps stimulate investment and accumulation of human and physical capital –This allows expansion of exports of goods that are intensive in these inputs  Liberalization reduces the burden on exports, and allows a wider range of exports to succeed

Manufactures have risen to 70 percent of exports from middle-income countries Share of exports by sector, (percent) Agricultural exports (%) Resources exports (%) Manufacturing exports (%)

Manufactures have grown from insignificance in exports from the Middle East & North Africa Share of exports by sector, Middle East and North Africa, (percent) Resources exports Manufacturing exports Agricultural exports

Conclusions  Import liberalization reduces the burden on exports by: –Directly reducing input costs –Reducing the price of nontraded goods  It also helps stimulate growth  And contributes to diversification of exports

Some References Clements, K. and Sjastaad, L. (1984), How Protection Taxes Exporters, Thames Essay No. 39, Trade Policy Research Centre, London. Frankel, J. A. and Romer, D. (1999), ‘Does trade cause growth’, American Economic Review 89(3): Wacziarg, R. (2001), ‘Measuring the dynamic gains from trade’, World Bank Economic Review 15(3): Winters, L.A. (2004), ‘Trade liberalization and economic performance: an overview’, Economic Journal 114:F4-F21.