Did Trade Liberalization Boost Total Factor Productivity Growth in Manufacturing in India in the 1990s?

Weilin Liu ()

International Productivity Monitor, 2022, vol. 43, 110-139

Abstract: India undertook substantial trade reforms from 1991 onwards, accompanied by extensive industrial reforms. Several studies undertaken to date based on growth accounting have reported that total factor productivity (TFP) growth in Indian manufacturing in the initial seven to ten years of the post-reform period was lower than that in the decade before the reforms. This finding is in sharp conflict with the sizeable econometric literature that has unambiguously established a positive effect of trade reforms on productivity, backed by strong theoretical reasons to expect such an effect. This article asserts that certain corrections are required in the computation of TFP growth in Indian manufacturing for the 1980s and 1990s for making a valid comparison and presents the corrected TFP growth rates. Further, an argument is built theoretically with some preliminary empirical support that a downward estimation bias is likely to arise when the conventional growth-accounting approach to the measurement of TFP growth is applied to a situation when major trade reforms are underway, as was the case with Indian manufacturing in the 1990s. Based on the TFP growth estimates obtained, a supportive plant-level analysis of the impact of tariff reform on productivity of Indian manufacturing plants, and the identified possible downward bias in TFP estimation, it is argued that in all probability the productivity growth performance of Indian manufacturing was better in the 1990s following the reforms than the performance in the 1980s.

Keywords: Productivity; Trade Liberalization; India (search for similar items in EconPapers)
Date: 2022
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