Trade and Growth: The Case of Brazil

Trade openness and growth tend to be positively associated. Both crosscountry evidence and recent micro-econometric studies suggest this. However, cross-country comparisons leave many questions open. Apart from measurement problems with openness, causality is hard to establish. Recent micro-econometric evidence on the effects of trade reform sheds a clearer light on efficiency change and turnover. In general, micro-econometric studies find that higher efficiency and faster turnover follow trade liberalization. However, Tybout (forthcoming) concludes in a recent literature review: “It is difficult to find studies that convincingly link these processes to the trade regime.” Most studies to date give little indication as to how trade liberalization benefits a country’s growth trajectory, and what microeconomic processes would underly the impact of trade reform on productivity change and, ultimately, economy-wide growth. Figure 1 presents a simple framework to unify micro-econometric evidence. The figure depicts a production possibility frontier and illustrates three important macroeconomic consequences of the microeconomic processes that trade reform can spur: (1) Trade-induced efficiency change, (2) trade-induced factor reallocations, and (3) trade-induced technology upgrading. Many micro-econometric studies to date tend to focus on these processes, either directly or indirectly. Needless to mention, there are several further effects of trade reform on domestic markets. I will briefly comment on some of those later. Trade allows firms and plants to raise their efficiency through access to world markets for intermediate and capital goods. In addition, fiercer