Trade Liberalization and Productivity Growth: Firm-level Evidence from Cameroon

Does trade liberalization foster total factor productivity (TFP) growth in the manufacturing sector? Does sectoral trade orientation determine sectoral TFP levels and growth rates? These questions are addressed using pooled pre-and post-liberalization panel data from Cameroonian firms of eight manufacturing industries. A single production function for the whole manufacturing sector is estimated using the Olley and Pakes approach and TFP indexes are derived. The results show that the pre-liberalization period was a very successful one for Cameroonian manufacturing firms. The estimated growth rate of TFP in manufacturing is 1.9 percent per annum. Except in textile, TFP rises rapidly in every manufacturing industry, ranging from a low of 0.04 percent per annum in rubber to a higher of 3.9 percent in wood. Over the post-liberalization period TFP growth in manufacturing decelerated on average by 0.2 percent per annum. The textile and rubber industries realize TFP growth rates of 1.7 and 3.9 percent per annum respectively while the observed annual TFP growth rates in the rest of industries are much slower than before trade liberalization. We then use the panel data methods to test for the effects of trade liberalization variables. We control for the endogeneity of trade policy using one-period lagged liberalization variables. To make the effect of trade liberalization clearer, we control for firm-level and industry heterogeneity, the political instability of the late 1980s and early 1990s, and for the 1994 devaluation. The results indicate that firms in industries with greater outward-orientation are more productive. Industry effective rate of assistance is a source of decreased TFP growth. To render the positive effect of import competition on TFP growth significant, the issue of supply constraints such as poor infrastructure, erratic supply of energy, low skill labor, corruption, etc. must be adequately addressed. The exit of less productive firms contributes to productivity improvements. TFP also increases with firms age while the political instability negatively affects firms’ TFP growth. JEL Classification: F13, D21, L6