“Researching the Trade Productivity Link: Evidence from Uruguay” Preliminary Draft

Development economists argue that trade protection reduces industrial sector efficiency, mainly through the distortion in relative prices, increased market power, x-inefficiency and inefficient scales of production. Nevertheless there is no convincing evidence on the link between trade reforms and improvement in economic performance. This work examines the case of Uruguay, an economy that introduced major trade reforms initially in the mid-1970s with a continuous reduction in trade barriers in the 1980s. In 1991, this process was deepened with the signature of the Asuncion Treaty aimed to the creation of the Southern Common Market. Thus the objective of this work is to analyse the impact of trade liberalisation –namely the increase in liberalisation as a result of the creation of the MERCOSUR -on economic performance for the Uruguayan case, in the period 1990-1994. To do so we estimate returns to scale for 37 branches at a 4-digit ISIC code level, as well as efficiency and dispersion, using a Cobb-Douglas production function. We kept the results only for 19 branches with unitary returns to scale and then we calculate the Spearman’s rank correlation coefficient between changes in scale, efficiency dispersion and changes in average rate of protection, nominal rate of protection and import penetration. The results did not show any significant association of the trade indicators with returns to scale. Then we estimate changes in labour productivity and price cost margins for 68 branches at a 4-digit ISIC code level. As explanatory variables we calculate a set of alternative indicators of trade liberalisation, as well as market structure and technology variables. We use the indicators of trade liberalisation, market structure and technology variables to explain changes in economic performance in a crosssectional regression model for the years 1990 and 1994. As many others other empirical works, our results are far from conclusive. While there is some weak evidence of a positive effect of trade liberalisation the results point out the importance of technology and market structures variables. Thus we can not expect trade liberalisation to be the only instrument to improve performance of the industrial sector in developing countries, and as the results show there is still a role for policies aimed to promote competition and technological change.