Trade Policy and Productivity Gains in Developing Countries: A Survey of the Literature

Despite the widely accepted view that liberal, outward-oriented trade policies are superior to restrictive, inward-oriented policies, doubts about liberalization remain strong in many circles. One reason for such doubt is the dearth of research quantifying the large gains that liberal trade policies are said to generate. The survey of the literature undertaken for this article was a review of the evidence on the link between trade policy and efficiency, or productivity, gains in developing countries. Does the literature support the view that more open trade policies bring greater efficiency? Several inferences are drawn from the literature on sources of growth-particularly with regard to increases in capacity utilization and economies of scale. The article also examines evidence from the few studies that explicitly try to correlate efficiency gains directly with trade policy. These studies fall into three categories: those that evaluate the effect of trade policy on market power or degree of competition; those that measure total factor productivity or technical efficiency gains and correlate these with the degree of protection; and those that estimate the aggregate effects of changes in trade policy on welfare (mainly with computable general equilibrium models, which measure dynamic efficiency gains from trade). In a final section, the article pulls together the findings from the indirect and direct evidence as a basis for suggesting a number of hypotheses on the link between efficiency and trade policy. One conclusion is that country-specific analysis over time appears to be superior to cross-country comparisons.