M. kabir Hassan
Abstract
This paper analyzes trade liberalization’s impact on Bangladesh’s manufacturing sector performance. Using firm level input and output data and employing a nonparametric data envelopment analysis (DEA), we calculate technical, pure technical and allocative efficiencies for a sample of 82 firms collected over two periods of time: 1993 and 1998. Then, applying a Malmquist index method, we calculate indices of total factor productivity change and decompose them into technological change, technical efficiency change and scale efficiency change. Our results show that the majority of Bangladeshi manufacturing firms experienced a positive total factor productivity growth between 1993 and 1998, averaging 29% over a five-year period. Export-oriented firms have performed better than import-oriented firms in improving their technical efficiency relative to the best-practice firms in their own sub-group. When these results are compared with the official statistics on the output performance of manufacturing firms, we can conclude that trade liberalization in the 1990s did not adversely affect the Bangladeshi manufacturing industry.
Introduction
In Bangladesh, trade liberalization has been an important component of structural reform efforts since mid 1980s. In early 1990s, the pace of trade liberalization has accelerated. Significant progress has since been made in removing quantitative restrictions (QRs) and in reducing the maximum and average tariff rates. Since the mid 1990s, however, the movement towards a lower and uniform tariff rate has slowed due to concerns for budgetary revenues, no the balance of payments, and, in particular, possible adverse effects of trade liberalization on import-competing industries (World Bank Report, 1999). In this period, a number of researchers, industrialists and government policy makers criticized Bangladesh’s trade liberalization for being too fast and for flooding domestic markets with foreign goods in amounts that harm local industries. They also contend that trade liberalization has, in particular, adversely affected import-competing industries, making some of them “sick” and forcing closure of others (Khan, 1994).
The import-substitution policy in the 1980s was replaced by export-led growth policy in the 1990s. As trade liberalization allows the export sector to grow along the line of comparative advantage, we could expect that export-oriented industries would contribute more to technical efficiency change. The unequal infrastructure conditions of various regions of the country are also expected to affect efficiency change in various types of industries differently. In order to evaluate the impact of trade liberalization, it is important to quantify the impact of trade liberalization on efficiency of manufacturing firms in Bangladesh (Rahman, 1997).
The literature on trade theory suggests that trade liberalization might improve productivity and efficiency through increased competition and shut down of non-optimizing firms, fostering scale efficiency, elimination of production waste, and diminishing managerial slack. Alternatively, trade liberalization might bring about productive efficiency through international transactions, which provide increased access to higher quality intermediate inputs. In addition, such advances in production performance may stem from capital goods that embody improved technologies, thereby augmenting opportunities for technology diffusion (Ozler & Yilmaz, 2002). However, as a counter argument, Rodrik (1992) maintains that if trade liberalization causes a reduction in market shares of domestic firms, they may lose their incentives to invest in better technologies when protection is lifted, with negative implications about their productive performance. Moreover, sudden liberal reforms can create instabilities when the underlying institutional structure contains serious weaknesses (Beim & Calomiris, 2001). Therefore, the relationship between trade liberalization and industry performance is subject to an empirical inquiry for fair conclusions.
A number of empirical studies that explored the impact of trade liberalization on industrial productivity/efficiency employing macro-level methods or industry level methods have generated mixed evidences. Roberts and Tybout (1991), Tybout (1992), Tybout and Westbrook (1995) could not find any evidence supporting industry rationalization or scale effects following trade reforms. Levinsohn and Petrin (2000) raise doubt on some of these results by reporting that rationalization case is empirically most significant when industry productivity increases. They also find that the probability for exit in response to an increase in imports is materially higher among small firms than it is among large firms. However, findings in the available studies are generally favorable to the hypothesis that trade liberalization leads to technical efficiency gains (Ozler and Yilmaz, 2002, Rodrik and Dani, 1995, Tybout et al., 1991, Yulek, 1998). Yulek (1998) in his dissertation shows that the industry efficiency improved as a result of liberal reforms launched in Turkey. Ozler and Yilmaz (2002) report that productivity gains in Turkey were largest during periods of rapid decline in protection rates. They also indicate that import-competing sectors had higher productivity gains upon trade reforms. Due to the reported favorable and unfavorable outcomes, it is clear that the empirical evidence is far from conclusive on the link between trade liberalization and performance. Our paper aims to shed further light on productivity and efficiency effects of trade reforms by drawing on Bangladeshi experience.3
In this framework, this paper analyzes trade liberalization’s impact on Bangladesh’s manufacturing sector. Using firm level input and output data and employing a nonparametric data envelopment analysis (DEA), we calculate technical (TE), pure technical (PTE) and scale (SE) efficiencies for a sample of 82 firms collected over two periods of time: 1993 and 1998. We use the DEA method because DEA (1) does not assume firms to be cost minimizers, thus, places no restrictions on the functional form of the production relationship; (2) focuses on individual observations rather than on population averages, (3) concentrates on revealed best-practice frontiers rather than on central-tendency properties of frontiers; (4) produces a single aggregate measure of the utilization of input factors to produce desired outputs; (5) requires less data, and (6) works well with a small sample, which is critical for our sample (Isik and Hassan, 2003, Zheng et al., 1998). Then, applying a Malmquist index method to panel data from 1993 to 1998 for 82 manufacturing firms, we calculate indices of total factor productivity change (TFPC) for the Bangladeshi manufacturing sector. This approach allows us to isolate contributions of technological change (TECHCH), technical efficiency change (EFFCH) and scale change (SECH) to productivity growth (TFPCH).
This paper contributes to the trade liberalization literature in a number of ways. First, to the best of our knowledge, this is the first study of this kind for the trade liberalization impact on the manufacturing industry of Bangladesh. Second, it is important to assess if trade liberalization boosts productivity and efficiency from a policy perspective. Trade liberalizations happen with large reallocations of labor and capital, with negative consequences for some interest groups in the local economy, making the measurement of gains from liberalization an important policy issue for governments. Third, it uses a unique survey data set, which was commissioned and collected by the World Bank. Fourth, we analyze productivity growth by market orientation, production size and geographical location of firms, with significant implications in regard to spatial, capital reallocation, competition and consolidation policies of the government. Finally, this study will be useful for international organizations (IMF and the World Bank), domestic policy makers and academic researchers who are interested in promoting free and fair trade worldwide.
Our results show that majority of Bangladeshi manufacturing firms experienced a positive total factor productivity growth between 1993 and 1998, averaging 26–29% over a five-year period. Export-oriented firms have done better in improving their technical efficiency relative to the best-practice (most efficient) firm(s) in their own sub-group, thus moving closer toward the maximum potential production. This convergence between the average export firms and the best performer(s) is expected among export-oriented firms that are normally exposed to more intensive competition and market and production knowledge.
Import-competing firms have generally lagged behind the most efficient firms in their own sub-group in improving their technical efficiency. This disparity basically reflects the protection that trade barriers provide to inefficient firms as well as to efficient, more dynamic, import-competing firms. The import-competing firms, however, show stronger positive technological progress, on average, than export-oriented firms over the five-year period. Two factors have contributed to their gains: the larger initial technology gap with the outside world that is normal for import-competing firms and the stimulus that a less restrictive trade policy fosters for larger leaps in technological progress by the best-practice import-competing firms. As a result, import-competing firms, on average, experience larger total factor productivity growth than export-oriented firms, even though many of the former failed to close the gap with the best practice firm(s).
Progressive reductions in trade restrictions in Bangladesh have played a role in improving manufacturing firms’ total factor productivity growth. By inducing competition, technological change and diffusion, and technical efficiency gains, the stimulus to trade has resulted in increased productivity of inputs. When these results are compared with the official statistics on the output performance of manufacturing firms, we can conclude that trade liberalization in the 1990s did not adversely affect the Bangladesh’s manufacturing industry.
This paper is divided into six sections. Following introduction in section I, Section II describes methodology, data and sample statistics. Section III provides and analyzes estimates of technical and scale efficiency measures in manufacturing sector. Section IV presents and discusses total factor productivity change of manufacturing sector during 1993–1998 period. Section V concludes the paper.
Empirical design for efficiency estimations
We estimate two separate annual efficiency frontiers for the years 1993 and 1998. We believe that the principal advantage of having panel data is the ability to observe each firm more than once over a period of time. This is a critical issue in a continuously changing business environment because the technology that is most efficient in one year may not be in another year (Isik & Hassan, 2002). Furthermore, by doing so, we alleviate at least to an extent, the problems related to the lack of
Estimates of firm technical and scale efficiency measures
Sample statistics of the measured values of the various efficiency estimates for the full sample (Panel A), and sub-samples (Panel B) are presented in Table 2, Table 3. Because efficiency indexes measure the relative performance of the sample firms with respect to a common frontier, it may be proper to study a homogenous set of firms. To address this concern as a robustness check, we construct separate (own-group) frontiers for each division in our sample (e.g., export versus import
Total factor productivity change of manufacturing industry in Bangladesh (1993–1998)
Recent empirical literature generally supports the view that outward orientation enhances total factor productivity growth. Promotion of exports had been a significant source of rapid productivity change, through greater access to best-practice technologies. In turn, non-exporting firms could benefit from such information-related externalities. If competitive pressures in export markets force firms to purchase new technology contained in imported inputs, then the imports of technology rather
Policy measures
Human capital development and technological catch-up cause total factor productivity change. Increases in total factor productivity change result from adjustment of labor markets to technological changes, which itself is enhanced by skill endowment and the progressive removal of trade barriers. Export promotion relaxes foreign exchange constraint, encouraging a progressive removal of external barriers and the increased import of technology. Trade liberalization policies and greater involvement
Conclusion
We use a nonparametric method to study the impact of efficiency changes in a sample of 82 firms in Bangladesh. Our results suggest the following conclusions. First, only firms in the export-oriented industry experience an increase in technical, pure technical and scale efficiency. Second, firms in non-export industry suffer a loss in technical, pure technical and scale efficiency. Third, all firms experience positive total factor productivity change implying that trade liberalization has
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