Liberalization Episodes Research Articles

Trade liberalization, social policies and health: an empirical case study.

BackgroundThis study investigates the health impacts of a major liberalization episode in the textile and clothing (T&C) sector. This episode triggered substantial shifts in employment across a wide range of countries. It is the first study to empirically link trade liberalization to health via changes in employment and offers some of the first empirical insights on how trade liberalization interacts with social policies to influence health.MethodsData from 32 T&C reliant countries were analysed in reference to the pre- and post-liberalization periods of 2000–2004 and 2005–2009. Fuzzy-set qualitative comparative analysis (fsQCA) was used to examine the association between countries’ a) level of development b) labour market and welfare state protections c) T&C employment changes and d) changes in adult female and infant mortality rates. Process tracing was used to further investigate these associations through twelve in-depth country studies.ResultsResults from the fsQCA relate changes in employment after the phase-out to both changing adult female and infant mortality rates. Findings from the in-depth country studies suggest that the worsening of adult female mortality rates is related to workers’ lack of social protection, both in the context of T&C employment growth and loss.ConclusionsOverall, it is found that social protection is often inaccessible to the type of workers who may be the most vulnerable to processes of liberalization and that many workers are particularly vulnerable due to the structure of social protection policies. Social policies are therefore found to both moderate pathways to health and influence the type of health-related pathways resulting from trade liberalizing policies.Electronic supplementary materialThe online version of this article (doi:10.1186/s12992-015-0126-8) contains supplementary material, which is available to authorized users.

The Effects of Trade Liberalization on Wage lnequality and Informality in Indonesia: an Empirical Study

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Trade Liberalization and the Skill Premium: A Local Labor Markets Approach

We develop a specific-factors model of regional economies that includes two types of workers, skilled and unskilled. The model delivers a simple equation relating trade-induced local shocks to changes in local skill premia. We apply the methodology to Brazil's early 1990s trade liberalization and find statistically significant but modest effects of liberalization on the evolution of the skill premium between 1991 and 2010. The methodology uses widely available household survey data and can easily be applied to other countries and liberalization episodes.

TRADE LIBERALIZATION IMPACT ON PAKISTAN’S IMPORT: THE ECONOMETRIC EVIDENCE

Utilizing the alternative econometric tools, this study analyzed for the impact of trade liberalization on Pakistan’s real import demand during the period of 1981-2010. Whereby extend the standard import demand by including import duties ratio and alternative dummies for high liberalization episodes. In results provide new trade elasticity estimates i.e. real income of the country follows by relative import prices largely explains the country’s demand for imports with expected positive and negative signs respectively. Further, depicts that reforms in trade policy in favour of trade liberalization has encouraged significantly Pakistan’s imports demand during the period.

Firm heterogeneity and the localization of economic activities

AbstractThis paper examines how market‐access strategies, via exports and FDI, respond to changes in the level of integration. Empirical evidence shows that both firm exports and multinational activity are affected by trade liberalization episodes. We account for the strong positive correlation between exports and FDI by developing a general‐equilibrium model featuring firm heterogeneity, trade and FDI with final and intermediate products. Different geographical spaces are considered to quantify the effect of a preferential trade agreement (PTA) on supply‐mode decisions, for both partner and excluded countries. The model sheds new light on the mechanisms through which geography reshapes the concentration of economic activities both inside and outside the PTA area.

The impact of ADR activity on stock market liquidity: Evidence from Latin America

Abstract This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets. We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II, and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods to handle the potential effects from stock market development on economic growth and ADR issuance, we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover, particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a statistical artifact created by the global financial crisis of 2008.

Do workers in exporting industries earn higher wages? Evidence from recent trade liberalisation episodes in two developing countries

This paper explores wage adjustments in the Moroccan and Egyptian manufacturing sectors over recent periods of rapid trade openness and export promotion. By utilising successive rounds of labour survey data merged with trade variables that capture export orientation, import penetration and reduction of tariffs, the results indicate that trade liberalisation in form of lower tariffs in both countries, and greater export orientation in Egypt, lead to significant wage gains. Additionally there are interesting sector and gender differentials. In Morocco, only private enterprise workers gain, whereas public enterprise witnesses substantial reductions in wages due to liberalisation. In contrast, in Egypt both types of workers witnessed wage gains, and these were even greater for public enterprise workers. In both countries, there is evidence that increased competition from trade has also reduced discrimination against female workers. The paper concludes by noting the fragility of such gains, and suggesting the need for further policies to preserve them, in the aftermath of world economic and financial crisis.

The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case

Following trade liberalization, several developing countries experienced a sharp increase in the share of informal manufacturing employment. In this paper, I examine the impacts of trade liberalization on the labor markets of a small open economy, in an environment in which tariffs affect firms' payroll tax compliance decisions. I demonstrate that a reduction in domestic import tariffs reduces the average formal wage and show that the direction of the effect on the share of informal employment depends on the initial labor market conditions. A cut in trading partner import tariffs decreases the share of domestic informal employment and increases the average formal wage. I confirm the model's principal findings empirically, using data from the 1989–2001 Brazilian trade liberalization episode. I find the results robust to endogeneity and self-selection concerns, which are addressed, respectively, using instrumental variable and switching regression approaches.

Public Spending and Trade Liberalization: The Compensation Hypothesis Revisited

Despite a widespread fascination with the so called compensation hypothesis – i.e. the proposition that governments have to provide insurance against the risks of open markets to make integration into the international economy politically feasible – there appears to exist a complete lack of research where a rather straightforward implication of this theoretical mechanism is concerned, namely that liberalization of the trade regime should become more likely with a larger public sector and more social spending already in place. In this paper, we test this hypothesis that can be regard as a complement to existing research on the compensation hypothesis. We draw on a theoretical model that links an individual's (uncertain) assessment of her future position in a liberalized economy to her support for government liberalization policies. By reducing uncertainty, diffusing gains among a larger set of individuals and rendering compensation promises more credible ex ante developed institutions of redistribution and economic insurance are argued to increase support for reforms towards free trade and thereby make liberalization more likely. We test the proposition that trade liberalization is facilitated by higher public spending empirically (a) on data on the evolution of average tariff rates in 20 post-World War II OECD democracies from 1951 to 1993 and (b) by leveraging data on major liberalization episodes from 1950 onwards in a global sample of democratic countries through event history analysis. Overall, we find no support for the hypothesis suggested by the compensation logic that public spending facilitates reforms towards free trade.

Tariff Liberalization and Trade Integration of Emerging Countries

This paper investigates how tariff liberalization has aected exporting at the product-destination level in emerging countries. We use a highly disaggregated (6 digit level of the harmonized system HS classication) bilateral measure of market access to compare taris applied in 1996 and 2006, which includes the timing of the Uruguay Round and episodes of bilateral liberalization. Our econometric estimations consider impacts of tari cuts on three components of the trade margins: extensive margin of entry (new trade relationships at the product-destination level), extensive margin of exit (disappearance of existing relationships) and intensive margin of trade (deepening existing relationships). Our main estimates indicate that a reduction of bilateral applied taris of 1 percentage point increases the extensive margin of entry by 0.1% and the intensive one by 2.09%, while it reduces the extensive margin of exit by 0.25%.

The Fiscal Cost of Trade Liberalization

This paper documents the fiscal cost of trade liberalization: the extent to which countries are able to recover the trade tax revenues lost from liberalizing trade by increasing tax revenues from other sources. Using a novel dataset on government revenues over the period 1792-2006 we compare the fiscal impact of trade liberalization in developing countries and in today’s rich countries at earlier stages of development. We find that trade liberalization episodes led to larger and longer-lived decreases in total tax revenues in developing countries since the 1970s than in rich countries in the 19th and early 20th centuries. Half the developing countries in our sample experience a fall in total tax revenues that lasts more than ten years after an episode. Results are similar when we consider government expenditures, suggesting decreases in trade tax revenues negatively affect governments’ capacity to provide public services in many developing countries.

Trends in Tariff Reforms and in the Structure of Wages

This paper provides new evidence on the impacts of trade reforms on wages. We first introduce a model of trade that combines a noncompetitive wage-setting mechanism due to unions with a factor abundance hypothesis. The predictions of the model are then econometrically investigated using Argentine data. Instead of achieving identification by comparing industrial wages before and after one episode of trade liberalization, our strategy exploits the recent historical record of policy changes adopted by Argentina: from significant protection in the early 1970s, to the first episode of liberalization during the late 1970s, then back to a slowdown of reforms during the 1980s, and finally to the second episode of liberalization in the 1990s. These swings in trade policy represent broken trends in trade reforms that we can compare with observed trends in wages and wage inequality. We use unusual historical data sets of trends in tariffs, wages, and wage inequality to examine the structure of wages in Argentina and explore how it is affected by tariff reforms. We find that trade liberalization, ceteris paribus, reduces wages; industry tariffs reduce the industry skill premium; and conditional on the structure of tariffs at the industry level, the average tariff in the economy is positively associated with the aggregate skill premium. These findings suggest that the observed trends in wage inequality in Latin America can be reconciled with the Stolper-Samuelson predictions in a model with unions.

An empirical analysis of Sri Lanka's Manufacturing Productivity slow-down

This paper analyses empirically the changes in Sri Lanka's manufacturing productivity during a period of regime shift from import substituting industrialisation to export-oriented industrialisation. We have used a varying coefficients stochastic production frontier model on a balanced panel data set to shed light on the effects of trade liberalisation on Total Factor Productivity which incorporates both changes in Technical Efficiency and Technical Progress. The results of the empirical validation of the stochastic production frontier model reveal that there were two distinct phases of output and productivity growth under each of the two trade liberalisation episodes that occurred during 1978–88 and 1988–97, respectively. The analysis carried out in this paper decomposing Total Factor Productivity into Technical Progress and Technical Efficiency also reveals that during early years of each episode, perspiration or factor inputs was the driving force of increased output growth giving way to ‘inspiration’ or technical progress as each phase matured. The stochastic production frontier empirics reported in this paper together with negative feedback effects emanating from the political turmoil and the prolonged ethnic conflict virtually brought the growth of foreign direct investment to a grinding halt in late 1980s, when the election of new right-wing government appears to have given a shot in the arm to overcome the paralysis of technical progress that seem to have contributed to the productivity slow-down in Sri Lanka's manufacturing sector in the eve of the new millennium.

Tax revenue and (or?) trade liberalization

With the public finances of many developing and emerging market countries still heavily dependent on trade tax revenues, further trade liberalization may be hindered unless they are able to develop alternative sources of revenue. Against a background of, and to inform, heightened theoretical controversy as to the appropriate balance between trade and other taxes (not least the VAT), this paper uses panel data for 117 countries over 32 years—cleaned for a variety of problems in standard data sources—to address a central question of fact: Have countries recovered from domestic taxes the revenues they have lost from past episodes of trade liberalization? For high income countries, the answer is clearly ‘yes.’ For middle income countries, there are robust signs of strong replacement both concurrently with the revenue loss and—essentially dollar-for-dollar—in the long run. Signs of significant recovery by low income countries are flimsier, however, and their experiences appear to have varied widely. The picture that emerges for low income countries is thus that replacement has been (and become) higher than previous studies have suggested, but sufficiently incomplete in many cases to give cause for concern.

The theoretical link between Capital Account liberalization and Currency Crisis Episodes

The paper investigates theoretical background if countries with unregulated capital flows are more vulnerable to currency crises. In order to solve this question properly the paper considers sequence, precondition of the Capital Account Liberalization process and different generation of currency crisis models. Furthermore, theoretical studies pointed that the speed and sequence of the CAL process needs to be adequate for the country financial development and financial liberalization.

Growth responses to competitive shocks: Market structure dynamics under liberalisation

Liberalisation transforms market structures through the responses of incumbent firms and entrants to freedom of choice. Market shares tend to turn more volatile, and the agility and competitiveness of small, as against large, firms determine whether markets grow more concentrated, or less. We analyse the way these processes played out in Indian manufacturing industries over the 17-year period from 1981, spanning the domestic liberalisation of 1985 and the more comprehensive reforms of 1991. An observer looking at summary measures of market concentration might conclude that not much happened under either liberalisation episode. In fact, market share grew significantly more turbulent, and the relationship between market share-growth and initial share changed considerably. Domestic and comprehensive liberalisation saw different types of course corrections in these processes. But in both liberalisation episodes they tended to offset one another in their impact on observed market concentration, which therefore, changed little.

On the distributional effects of trade policy: Dynamics of household saving and asset prices

This paper studies the effect of trade liberalization on inequality. We develop a theoretical framework that generates economy-wide distributions of wealth and income for different levels of trade protection. The model unambiguously determines the effect of liberalization on inequality; and rationalizes why larger inequality can be the outcome of a welfare enhancing policy, as households reduce their buffer savings when liberalization lowers the price of food. The framework reconciles the increase in inequality, the fall in the value of land, and farmers’ opposition to freer trade, that have featured in different liberalization episodes. We also present empirical support for the model’s predictions.

The IMF and the Liberalization of Capital Flows

AbstractWe evaluate the claim that the International Monetary Fund precipitated financial crises during the 1990s, by pressuring countries to liberalize their capital accounts prematurely. Using data from a panel of developing economies from 1982–98, we examine whether the changes in the regime governing capital flows took place during participation in IMF programs. We find evidence that IMF program participation is correlated with capital account liberalization episodes during the 1990s. We verify the robustness of our results using alternative indicators of capital account openness. To determine whether decontrol was premature, we compare the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently, and find some evidence of IMF‐led premature liberalizations.

Trends in Tariff Reforms and Trends in the Structure of Wages

This paper provides new evidence on the impacts of trade reforms on wages. Instead of achieving identification by comparing industrial wages before and after one episode of trade liberalization, our strategy exploits the recent historical record of policy changes adopted by Argentina: from significant protection in the early 1970s, to the first episode of liberalization during the late 1970s, back to a slowdown of reforms during the 1980s, to the second episode of liberalization in the 1990s. These swings in trade policy comprise broken trends in trade reforms that we can compare with observed trends in wages and wage inequality. We use unusual historical data sets of trends in tariffs, wages, and wage inequality to examine the structure of wages in Argentina and to explore how it is affected by tariff reforms. We find that i) trade liberalization, ceteris paribus, reduces wages; ii) industry tariffs reduce the industry skill premium; iii) conditional on the structure of tariffs at the industry level, the average tariff in the economy is positively associated with the average skill premium. To explain these results, we present a model that combines a non-competitive wage setting mechanism due to unions with a factor abundance hypothesis. Overall, our work suggests that the observed trends in wage inequality in Latin America can be consistent with the Stolper-Samuelson predictions in a model with unions.

Trade Liberalization and Growth: New Evidence

A new data set of on openness indicators and trade liberalization dates allows the 1995 Sachs and Warner study on the relationship between trade openness and economic growth to be extended to the 1990s. New evidence on the time paths of economic growth, physical capital investment, and openness around episodes of trade policy liberalization is also presented. Analysis based on the new data set suggests that over the 1950–98 period, countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization. Postliberalization investment rates rose 1.5–2.0 percentage points, confirming past findings that liberalization fosters growth in part through its effect on physical capital accumulation. Liberalization raised the average trade to GDP ratio by roughly 5 percentage points, suggesting that trade policy liberalization did indeed raise the actual level of openness of liberalizers. However, these average effects mask large differences across countries.