Imports and Skill Utilization in a Low-Income Context*

One of the primary benefits of international trade in a low-income context is the presumed ability, through trade, to access higher levels of technology through imports. Despite this, very little research has been done on international trade in a low-income (as opposed to middle-income) context, and even less concretely exploring the role of imports, largely because of the paucity of data available. This paper explores the consequences of importing on the utilization of skills in the low-income context of Rwanda, utilizing a unique linked dataset. In particular, the causal impact of imports on skill utilization is explored, with particular attention to whether or not the imports are sourced from high-income countries (and therefore of higher quality/technology). The causal impact of imports is obtained through the use of an instrumental variable procedure where the changes in the exchange rates faced by a firm during the sample period on the basket of goods imported by the firm prior to the sample period are used as instruments for the changes in imports during the sample period. A theoretical model is built that incorporates the skill complementarity hypothesis (as well as a trade-related required services hypothesis due to Matsuyama (2007)), and this model is tested in the context of Rwanda, using data on all firms with registered payroll in Rwanda (not just manufacturing firms). We investigate the effects for different import sources, as well as importing within different sectors (manufacturing, hotel and restaurant services, wholesale & retail trade, etc.).