1. Revisiting Integration and Productivity Discussion for IPES 2010 October 14, 2008

2. Outline of presentation  Discussion on background papers  Tentative outline for the chapter

3. Motivation  The policy debate has moved on from whether or not countries should open their economies (most of them have already done it and there is no clear police reversal in sight) to how can they take better advantage of trade.  There is a clear need to better understand the channels through which trade can boost productivity and growth. Gains from trade cannot be taken for granted.  Research has proceed in two directions: 1) Macro level : Dollar (1992), Sachs and Warner (1995), Edwards (1998), Frankel and Romer (1999), Rodriguez and Rodrik (2000), Taylor and Estevadeordal (2008) 2) Micro level : Lopez-Cordova, Mesquita (2003), Muendler (2002); Pavcnik (2002), Fernandes (2003), IDB (2002)  Shortcomings and omissions: 1)Revenue bias 2)Lack of clear theoretical framework for firm heterogeneity 3) Exclusive focus on policy barriers (tariffs)  Background papers will revisit this second and more robust strand of the literature. Seek to address these weaknesses

4. 1) Revenue bias  Proxy for firm’s output: firm’s revenues deflated by industry price index biased productivity measure

5. 1) Revenue bias  Proxy for firm’s output: firm’s revenues deflated by industry price index biased productivity measure  How serious is this problem? Loecker (2007); Haltiwanger and Syverson (2005); Katayama, Lu and Tybout (2006)

6. 1) Revenue bias  Proxy for firm’s output: firm’s revenues deflated by industry price index biased productivity measure  How serious is this problem? Loecker (2007); Haltiwanger and Syverson (2005); Katayama, Lu and Tybout (2006)  Solutions? Levinsohn and Melitz (2002); Loecker (2007), Katayama, Lu and Tybout (2006)

7. 2) Weak theoretical framework  Until recently, trade theory had not much to say about heterogeneity of firm performances observed within industries

8. 2) Weak theoretical framework  Until recently, trade theory had not much to say about heterogeneity of firm performances observed within industries  Melitz (2003); Bernard, Eaton, Jensen and Kortum (2003)

9. 2) Weak theoretical framework  Until recently, trade theory had not much to say about heterogeneity of firm performances observed within industries  Melitz (2003); Bernard, Eaton, Jensen and Kortum (2003)  New models generate clear predictions about the effects of trade at the micro level

10. 2) Weak theoretical framework  Until recently, trade theory had not much to say about heterogeneity of firm performances observed within industries  Melitz (2003); Bernard, Eaton, Jensen and Kortum (2003)  New models generate clear predictions about the effects of trade at the micro level  New models also make more explicit the role of other factors (competition, foreign entry) in the linkage between trade and productivity

11. 3) Excessive focus on tariff barriers  Previous research looked exclusively at tariff barriers as the only obstacle to trade

12. 3) Excessive focus on tariff barriers  Previous research looked exclusively at tariff barriers as the only obstacle to trade  After years of trade liberalization, policy barriers have lost relevance vis-à-vis other trade costs, like transport costs

13. 3) Excessive focus on tariff barriers  Previous research looked exclusively at tariff barriers as the only obstacle to trade  After years of trade liberalization, policy barriers have lost relevance vis-à-vis other trade costs, like transport costs  For most LAC countries, transport costs are significantly higher than tariffs –for imports and exports (IDB, 2008)

14. 3) Excessive focus on tariff barriers  Previous research looked exclusively at tariff barriers as the only obstacle to trade  After years of trade liberalization, policy barriers have lost relevance vis-à-vis other trade costs, like transport costs  For most LAC countries, transport costs are significantly higher than tariffs –for imports and exports (IDB, 2008)  Need to acknowledge the role of transport costs as a barrier to trade and assess their impact on productivity

15. Background papers  Objective: revisit the relationship between integration and productivity using plant (firm) level data for ARG, BRA, CHL, MEX and VEN, addressing the previous weaknesses

16. Background papers  Objective: revisit the relationship between integration and productivity using plant (firm) level data for ARG, BRA, CHL, MEX and VEN, by addressing previous weaknesses  Aspects the papers will examine: i) Reallocation effects from changes in trade costs ii) Plant-productivity effects from changes in trade costs iii) How competition and foreign entry (FDI) interact with (i) and (ii)

17. i) Reallocation effects

18.  Some testable hypotheses (from Melitz, 2003). A decrease in trade costs: 1)leads to an aggregate productivity gain 2)raises the probability of firm exit 3)increases the number of exporting firms 4)increases export sales of the existing exporters

19. i) Reallocation effects  Some testable hypotheses (from Melitz, 2003). A decrease in trade costs: 1)leads to an aggregate productivity gain 2)raises the probability of firm exit 3)increases the number of exporting firms 4)increases export sales of the existing exporters  Aim: to explore the extent of the reallocation effects and the potential channels by which they take place

20. ii) Plant productivity effects

21.  Previous studies found only modest effects of exporting on plant productivity (Bernard and Jensen, 1999; Clerides, Lach and Tybout, 1998; Aw, Chung and Roberts, 2000)

22. ii) Plant productivity effects  Previous studies found only modest effects of exporting on plant productivity (Bernard and Jensen, 1999; Clerides, Lach and Tybout, 1998; Aw, Chung and Roberts, 2000)  But there are many possible channels: scale efficiency, more and better inputs, import discipline, Schumpeterian incentives

23. ii) Plant productivity effects  Previous studies found only modest effects of exporting on plant productivity (Bernard and Jensen, 1999; Clerides, Lach and Tybout, 1998; Aw, Chung and Roberts, 2000)  But there are many possible channels: scale efficiency, more and better inputs, import discipline, Schumpeterian incentives  Aim: to explore the role of different channels

24. iii) The role of competition and foreign entry in the trade-productivity link

25.  Barriers to entry (including foreign entry) could limit the reallocation gains from a fall in trade costs

26. iii) The role of competition and foreign entry in the trade-productivity link  Barriers to entry (including foreign entry) could limit the reallocation gains from a fall in trade costs  Barriers to entry could also limit the plant-productivity gains from a fall in trade costs

27. iii) The role of competition and foreign entry in the trade-productivity link  Barriers to entry (including foreign entry) could limit the reallocation gains from a fall in trade costs  Barriers to entry could also limit the plant-productivity gains from a fall in trade costs  Aim: assess to what extent barriers to competition and FDI erode the effects of trade on productivity

28. Data Manufacturing Data  Argentina: Encuestas Nacionales sobre la Conducta Tecnológica de las Empresas Industriales Argentinas  Brazil: Pesquisa Industrial Anual –PIA  Chile: Encuesta Nacional Industrial Anual –ENIA  Mexico: Encuesta Industrial Anual –EIA  Venezuela: Encuesta Industrial Anual Trade Costs Data  Foreign Trade Statistic System (from ALADI)  US Imports Merchandise (from US Census Bureau)  Both sources report data on import duties and on freights at the 6-digit harmonized system Coverage  Potentially 1995-2005

29. Summary of empirical strategy On reallocation effects  Strategy based on Bernard, et al (2006)  Tests of hypotheses based on appropriate specification. For example:  Industry effects (hypothesis 1): industry-level regressions of changes in industry TFP on lagged changes in trade costs and industry and year fixed effects  Firm exit (hypothesis 2): logistic regressions of the rate of plant death on lagged changes in trade costs, plant controls and industry and year fixed effects

30. Summary of empirical strategy On reallocation effects  Strategy based on Bernard, et al (2006)  Tests of hypotheses based on appropriate specification. For example:  Industry effects (hypothesis 1): industry-level regressions of changes in industry TFP on lagged changes in trade costs and industry and year fixed effects  Firm exit (hypothesis 2): logistic regressions of the rate of plant death on lagged changes in trade costs, plant controls and industry and year fixed effects On plant effects  Strategy based on Lopez-Cordova and Mesquita (2004)  General idea is to construct proxies to test different channel using plant- level regressions

31. Summary of empirical strategy On the role of competition and foreign entry  The general idea is to exploit the industry variation on barriers to entry (including foreign entry) to analyze whether the reallocation effects, or the plant effects, differ in industries with various degrees of entry  We will use different proxies for barriers to entry  High-entry versus low entry industries (Herfindal indexes, US natural rate of entry, etc)  High-FDI versus Low-FDI industries  Tradable versus non-tradable industries  Industries close and far from technology frontier (RCA indexes, shares of exports)

32. Summary of empirical strategy On the role of competition and foreign entry  The general idea is to exploit the industry variation on barriers to entry (including foreign entry) to analyze whether the reallocation effects, or the plant effects, differ in industries with various degrees of entry  We will use different proxies for barriers to entry  High-entry versus low entry industries (Herfindal indexes, US natural rate of entry, etc)  High-FDI versus Low-FDI industries  Tradable versus non-tradable industries  Industries close and far from technology frontier (RCA indexes, shares of exports) Note: In each of the above aspects we will try to differentiate the impact of tariffs barriers from the impact of transport costs

33. Tentative Outline Introduction  Literature review: links between integration and productivity  Main empirical findings already available for LAC  Why it is important to revisit this topic again?  Revenue bias  Recent theoretical developments  Excessive focus on traditional barriers to trade

34. Tentative Outline Introduction  Literature review: links between integration and productivity  Main empirical findings already available for LAC  Why it is important to revisit this topic again?  Revenue bias  Recent theoretical developments  Excessive focus on traditional barriers to trade Main Empirical Findings (based on in-house background papers plus papers for Colombia and Uruguay)  Reallocation effects, plant effects  What’s new, what’s confirmed, what’s not confirmed

35. Tentative Outline Introduction  Literature review: links between integration and productivity  Main empirical findings already available for LAC  Why it is important to revisit this topic again?  Revenue bias  Recent theoretical developments  Excessive focus on traditional barriers to trade Main Empirical Findings (based on in-house background papers plus papers for Colombia and Uruguay)  Reallocation effects, plant effects  What’s new, what’s confirmed, what’s not confirmed Policy implications  The role of trade barriers on productivity: tariffs versus transport costs  How to move forward in reducing transport costs (IDB, 2008; Special boxes)  The role of complementary policies: addressing barriers to entry and FDI