Trade Policy Reform and Productivity: The Colombian Manufacturing Sector from 1977 to 2001

Abstract

This paper analyzes the effects on Colombian manufacturing productivity of foreign trade policy changes during the 1990s. Our results indicate that between 1978 and 1998, aggregate manufacturing productivity largely stagnates and even declines in some of the larger industries. Between 1999 and 2001, however, manufacturing productivity shows significant growth. Contraction of the economic activity in 1999 appears as a positive shock. There is little entry and exit of plants or reallocation of labor throughout the observed period. The productivity stagnation can be explained by this lack of liquidation of unproductive plants combined with slow technological advance. Dynamics vary significantly across sub-sectors, however, and our findings attribute this variation primarily to within-sector output reallocation. The importance of industrial policy is large. Sector-level productivity declines coincide with protectionist policies in the form of import tariffs, while rising productivity is correlated with sectors increasing exposure to foreign markets.