Trade Reforms and Total Factor Productivity

Abstract

The relationship between trade reforms and industry performance has been undecided both on theoretical and empirical grounds. Amidst of this, Ethiopia has undertaken series of trade and other economic reform measures since 1992. The objective of this paper is to assess firm-level TFP heterogeneity in the Ethiopian manufacturing industry during and post-trade reform periods. Based on unbalanced panel data of 8395 manufacturing firms engaging 10 and above persons for the period (1996 and 2007), TFP was estimated using Olley and Pakes (1996) with Yasar et al. (2008) STATA application. The study found heterogeneous firm-level TFP in line with contemporary economic theories with skewed distribution with relatively high concentration of unproductive firms to the left. Import-intensive, exporting, incumbent and also smaller and large-scale firms performed more productively as compared to resource-based, nonexporting, exiting and medium sized firms, respectively, over the entire period. While the manufacturing sector has become more productive during the post-reform period, private, non-exporting, import-dependent, large-scale and incumbent firms contributed a statically significant improvement in TFP scores during this period. These results are consistent with many present-day studies. Despite being based on local-resources, exporting firms have not shown TFP improvement mainly because of the scarcity of raw materials. Overall, the findings suggest that the government may need to investigate the bottlenecks holding back the linkage between agro-processing industries and the agricultural sector to improve the performance of resource-based industries in general, and the exporting firms in particular. Medium scale industries also require an equal support as small enterprises, in terms of access to market, loans and other services so as to cope-up with the competitive push. Otherwise, further trade reform would improve the overall TFP of the manufacturing sector if the necessary precaution is put in place in terms of addressing the above and related bottlenecks.