Trade reform, efficiency and growth

Countries with well functioning markets and a diversified production structure benefit more than other countries from the productivity gains through trade reform.The main objective of trade reform is to make markets more competitive and, by introducing competition among previously protected domestic firms, to change the behavior and performance of firms. Efficiency gains are achieved through increased productivity --- more efficient use of resources --- and a shift in resources from inefficient to efficient sectors. As a result of increased efficiency, output grows.But the transition from a restrictive to an open trade regime can impose short-term adjustment costs for industries newly exposed to external competition. This can be compounded by efforts to restore macroeconomic stabilization, such as reductions in fiscal deficits that could hurt the country's infrastructure.Ghani and Jayarajah examine the impact of trade reform on productivity and GDP growth, export growth, the diversification of exports, and the trade balance. They also examine whether trade reform affects different reforming countries differently --- whether its outcome is related to such factors as the functioning of markets or the level of diversification in production at the time reform is begun.Their findings confirm the link between trade reform and efficiency gains. Reduced average tariffs and quantitative restrictions on imports are associated with increased output growth for a given level of investment and capacity use. But the extent to which trade reform helps a country reflects the initial conditions prevailing in the country.Ghana, Indonesia, and Turkey began their trade reform programs under different conditions. Indonesia and Turkey had a more diversified production structure and a better functioning market than Ghana. All three countries carried out intensive trade reform, but Indonesia and Turkey benefited more than Ghana did.In short, countries with well functioning markets and a better human resource base benefit more from productivity gains resulting from trade reform than countries with less well functioning markets do.This paper --- a joint product of the Country Operations Division, Eastern Africa Department, and the Country Policy, Industry, and Finance Division, Operations Evaluation Department --- is part of a larger effort in the Bank to identify sustainable conditions for growth. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Afsar Nokhostin, room J10285, extension 34150 (17 pages)