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In recent years, some authors have suggested that economic integration and
liberalization of international trade are likely to have positive effects not only on
productivity levels but also on long-term productivity growth rates in developing
countries. Using a panel of Iranian manufacturing industries, this paper examines
several alternative mechanisms through which trade contributes positively to
productivity levels and growth rates. Special attention is paid to the trade
liberalization implemented in Iran after 1989. The results indicate that reductions in
rates of protection have significant positive effects on sectoral productivity levels.
The estimates also suggest that after liberalization, increasing share of exports in
total output increased average total factor productivity by 9.3 percent. However, the
rates are found to be statistically insignificant.
When there are greate price distortions and under- utilized capacity, import
liberalization may well produce quick increases in factor productivity in short-term
but something more fundamental has to come into play to increase the long-term
growth rate.